Q3 2023 California Water Service Group Earnings Call
Good morning, My name is Krista and I'll be your conference operator today at this time I would like to welcome everyone to the California Water Service Group third quarter 2023 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be.
A question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad and if you would like to withdraw your question again Press Star one. Thank you I will now turn the conference over to David Healey, Vice President Chief Financial Officer and treasure.
Sir you May begin your conference.
Thank you Chris welcome.
Welcome everyone. So the 'twenty to 'twenty three.
Third quarter results call for California Water service group.
Me today is Marty properly.
Our chairman and CEO.
And Greg Miller, our vice President of rates and regulatory Affairs officer.
Replay dial in information for this call can be found in our quarterly results release.
Each was issued earlier today the.
The replay will be available until December 'twenty 2023, as a reminder, before we begin the company has.
Slide deck to accompany the earnings call this quarter.
Jack was furnished with our form 8-K. This morning and is also available at the company's website.
WWE <unk> groups.
Yeah.
Before looking at this quarters results, we'd like to take a few moments to cover forward looking statements. During the course of the call. The company may make certain forward looking statements because these statements deal with future events. They are subject to various risks and uncertainties.
And actual results could differ materially from the company's current expectations.
Because of this.
Companies strongly advises current shareholders as well as interested parties to carefully read and understand the company's disclosures on risks and uncertainties found in our Form 10-K.
Form 10-Q press releases and other reports filed from time to time with the Securities and Exchange Commission.
I'm going to start by turning to slide four.
Sage our values and priorities.
Sure.
Moving on to slide five.
Third quarter financial highlights as discussed last quarter.
Third quarter and year to date results primarily the.
Adverse impact of the delayed proposed decision from the California Public Utilities Commission or CPUC.
Cal water's ending 2021 general rate case to set new rates rate design and regulatory mechanism.
Once approved by the CPUC.
The general rate case, the cumulative adjustments will be retroactive to January one 2023.
There is one change from our last quarter's discussion.
The delay.
The general rate case is now expected to Midland CPUC approval.
Nice ladder for the 2023 drought response memorandum account or dream up.
Operating revenue into calendar year 'twenty 'twenty four.
We estimate the adverse impact.
Delayed general rate case on third quarter 2023 operating revenue to be in the range from 14 million to 27 billion of which 5 million to $5 5 million is related to train them.
Our estimate is based on our on the current positions of the parties to the California General rate case filings.
Sumption driven regulatory mechanisms as noted on slide five.
Third quarter 2023, operating revenue decreased 11 3 million to 255 million.
As compared to the same periods last year.
Decrease was primarily from the $29 6 million decrease in Rand and CPA revenue as those mechanisms concluded on December 31 2022.
The decrease was partially offset by <unk>.
$13 7 million of 2023 general rate increases and a 1.8 million reduction in revenue deferral.
Third quarter 2023, operating expenses increased 10 $1 billion to 211 5 million as compared to the same period last year.
The increase was in line with expectations and as noted on slide five was due mostly to increases in water production costs bad debt expense cost from a reduction in revenue deferral employee labor cost and depreciation and amortization.
<unk> expense.
Moving on to page six.
During the third quarter.
2023, net income attributable to group.
Was $34 4 billion and diluted earnings per share was <unk> 60 <unk>.
Compared to net income attributable to group at $55 9 million and diluted earnings per share of $1. Three for the quarter ended September 30 of 2022 as discussed the delayed caliber.
California General rate case proposed decision had an adverse impact on net income.
European pulp supergroup as noted at the bottom of the slide.
I'm pleased to report group's capital investments during the third quarter of 2023 was 96.
<unk> 9 million.
Which was a 25% increase from the same period last year.
And now I'll turn it over to Greg element to cover slides.
Thank you Dave.
On slide seven you can see as we've discussed in prior quarters, we have three and recorded California Records regulatory mechanism.
We are tracking our practice is not to record revenue revenue until the 'twenty eight 'twenty, one CMO danone and approved by the Commission.
All of these mechanisms that dates that are go back effective January one 2023.
Yes.
Largely the interim rates memo account thats the difference between interim rates in our final rates.
The moderate style revenue adjustment mechanism.
Difference between actual residential sales revenue and residential sales revenue at a single quantity rate.
And then we have the drought response level accounts that tax difference.
Sales revenue.
Oh, sorry tax difference and reduced sales revenues from observation during a drought. This will stay open until California, Governor Gavin, California, Governor Gavin Newsom.
Declared the drought over which could happen in sometime in 'twenty three 'twenty four or.
Depending on what happens with the weather in our states and say up longer.
Covering from that will be by a separate filing and as Dave indicated.
Those revenues will not be recorded in 2003 that'll be recorded once the commission approves that.
Bob Seidel.
Turning to slide eight.
This is just gives you the financial impacts.
Three recorded regulatory mechanisms or the third quarter.
Again, as Dave said based on the current position.
Parties in the 'twenty ones <unk> filing we estimate an understatement of operating revenues during the third quarter to be in the range of 14 to 27 million or <unk> 22 to <unk> 41.
Earnings per share.
Nothing of note would be the.
Right before the Subtotal, where it says M. Ram you will see that they are negative numbers. This is right in line with what we would expect for the memorandum account. When you go into the summer months customers are using water in the more expensive third and four tiers and the single quantity rate is.
More in line with the second tier and so it basically.
Starting to annualize the numbers that we would expect for the year later on in the debt will come across the slides that will show the same cable with year to date results and you'll see with.
Almost three quarters of the year being completed the numbers are coming in line with what we would expect on an annualized basis.
With that I will turn it back to you David.
Thank you Greg moving to slide nine additional Q3 2023 highlights.
As noted on the slide two.
'twenty 'twenty four operating revenue is expected to increase approximately $10 million from an increase in Cal water's return on equity to 10, 7% effective January one 2024.
Increase was from the water cost of capital mechanism for.
For the period from October one 2022 to September 30 of 2023.
We will discuss this in more detail later in the presentation.
Also Cal water entered into an agreement with the California Department of community services and development to help low income customers access funds through the state's low income.
So water assistance programs to pay monthly water bills. It's another example of our ongoing efforts to provide affordable water service to our customers.
Moving to slide 10, we present, our earnings per share bridge, which details the changes from 2022 third quarter earnings per share to 2023 third quarter earnings per share.
Moving on to slide 11 year to date 2023 financial highlights.
As discussed earlier due to the delayed California General rate case, we estimate the adverse impact on the first nine months of 2023 operating revenues to be in the range from approximately 60 million to $93 million.
<unk> 16 million to $18 million is related to the dream.
Our estimate is based on the current positions of the parties for the California General rate case filing and consumption driven mechanism as discussed earlier, we expect CPUC approval of the advice letter through 2023 dream of operating revenue in 2024.
As noted on the slides.
Operating revenue for the nine months period ended September 32023 decreased $65 4 million to $580 1 million as compared to the same period last year.
The decrease was primarily from a $48 8 million decrease in Rand and CPA revenue.
As those revenue mechanisms concluded on December 31, 2022.
At $20 million increase in revenue.
Deferrals.
And at $25 3 million decrease in build metered revenue.
These decreases were partially offset.
General rate increases.
Krista: Good morning. My name is Krista and I'll be your conference operator today. At this time, I would like to welcome everyone to the California Water Service Group, third quarter 2023 earnings conference call.
And change in balancing accounts and interest on the net rent CPA balances.
Third quarter operating expenses decreased $5 9 million to $538 2 million as compared to the same period last year.
Krista: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, follow by the number one on your telephone keypad. And if you would like to withdraw your question, again, press star one.
Overall.
Third quarter 2023 operating expenses were in line with expectations.
Decrease was mostly due to a $16 4 million decrease in costs associated with revenue deferral and the $3 million decrease in 100% water production costs.
Which was partially.
Krista: Thank you.
Offset.
By increases of $7 7 billion in employee labor costs, and $3 2 million of amortization expense and $1 9 million for property and other taxes.
David Healey: I will now turn a conference over to David Healey, Vice President Chief Financial Officer, and Treasurer. You may begin your conference. Thank you, Krista.
David Healey: Welcome everyone to the 2023 third quarter results call for California Water Service Group. With me today, is Marty Kropelnicki. Our chairman and CEO and Greg Milleman are Vice President, Rates, and Regulatory Affairs Officer. Replay dial information for this call can be found in our quarterly results release, which was issued earlier today. The replay will be available until December 25, 2023. As a reminder, before we begin, the company has a slide back to accompany the earnings call this quarter.
Moving on to slide 12 financial results year to date 2023 so.
So the nine month period ended September 32023.
Net income attributable to group was $21 7 billion or 38 earnings per diluted common share compared to net income attributable to group of 76 4 million or $1 41 earnings per diluted common share for the nine month period ended.
David Healey: The slide deck was furnished. With the form 8K this morning and is also available at the company's website at www.kelwatergroup.com. Before looking at this quarter's results, we'd like to take a few moments to cover forward-looking statements. During the course of the call, the company may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties and actual results to differ materially from the company's current expectations.
September 32022 as discussed our year to date results reflect the temporary absence of 2023, California General rate case.
David Healey: Because of this, the company strongly advises current shareholders as well as interested parties to carefully read and understand the company's disclosures on risk and uncertainties found in our form 10K, form 10Q, press releases, and other reports filed from time to time with the Securities and Exchange Commission.
Great release, 10 revenue adjustments from regulatory mechanisms as.
As noted at the bottom of Slide 12 group invested $274 $1 million in infrastructure investments. During the nine month period ended September 32023, which was a 23, 4% increase from the same period last year.
Moving to lot to slides.
13.
Which is the year to date unrecorded, California regulatory mechanisms details.
J D. It breaks out.
Revenue by the different regulatory mechanisms and Greg pretty much covered that.
David Healey: I'm going to start by turning the slide 4, which states our values and priorities, moving on to slide 5, third quarter financial highlights. As discussed last quarter, third quarter and year-to-date results primarily reflect the adverse impact of the delayed proposed decisions from the California Public Utilities Commission or CPUC on CalWaters pending 2021 general rate case to set new rates, rate design, and regulatory mechanisms. Once approved by the CPUC, the general rate case accumulative adjustment will be retroactive to January 1, 2023.
Details of these so.
<unk> move on to slide 14, which.
Our year to date earnings per share bridge, which details the changes from year to date September 30th 2022 earnings per shares to year to date September 32023 earnings per share.
Now I'll turn it over to Marty to cover slide 15.
Thanks, Dave Good morning, everyone as we kind of.
Go through the fog of the delayed rate case and certainly.
Having $60 million to $90 million of revenue, we can't record our 93 to 93 to $1 45, a share that we can't recognize that we're waiting for.
The rate case to be approved makes things complicated there are certainly some some additional highlights I'd like to talk about for the quarter. Firstly as Dave just mentioned our capital investment program year to date, we're at a new high.
David Healey: There's one change from our last quarter's discussion. The delay of the general rate case is now expected to move. CTE, you see approval of the advice letter for the 2023 drought response, Memorandum account or DREAMA, operating revenue into calendar year 2024. We estimate the adverse impact of the delay general rate case on third quarter 2023 operating revenue to be in the range from 14 million to 27 million of which 5 million to 5.5 million is related to DREAMA.
We are on track going into the fourth quarter to have a record capital investment year for group for 2023, and I just want to remind everyone that is really the basis and the foundation from which we grow future earnings that continues to be strong we got a fairly fairly mild.
Some are out on the west coast.
Along with the mild summer fire season, and believe it or not has been fairly mild as well with the exception of the buyers that were experienced in west Maui.
Overall, we have about another four weeks of fire season, so far knock on wood out on the West coast things have been fairly team and we look forward to getting buyers seeking wrapped up this year and then planning for 2020 for a fire season.
David Healey: Our estimate is based on the current positions of the parties to the California General rate case filing and consumption driven regulatory mechanisms. As noted on slide 5, third quarter 2023 operating revenue decreased 11.3 million to 255 million as compared to the same period last year. The decrease was primarily from the 29.6 million decrease in RAM and NCAA revenue as those mechanisms concluded on 7.31, 2022. The decrease was partially offset by 13.7 million of 2023 general rate increases and a 1.8 million reduction in revenue deferral.
Looking at the West Nowy fires, albeit the amount of acreage burned. It was 6753 acres, which is which is not much at all especially in California. When we dealt with wildfires that have been in excess of 400000 acres burn they were very devastating because it was in <unk>.
Islands and Maui.
Fires that took place in early August there were really a series of three buyers like were started and it was really the.
The perfect storm between a drought that they were having in the Hawaiian Islands.
Climate change, it's just been more dry arid and then believe it or not he had the remnants of hurricane and hurricane wins that came in that cause these fires to really take off and the upcountry you had the cooler in the Atlanta fire.
And those who were close to our <unk> system.
David Healey: Third quarter 2023 operating expenses increased 10.1 million to 211.5 million as compared to the same period last year. The increase was in line with expectation and as noted on slide 5 was due mostly to increases in water production costs, bad debt expense, costs from a reduction in revenue deferral, employee labor cost and depreciation and amortization expense. Moving on to page 6, during the third quarter of 2023 net income to trivial to group was 34.4 million and diluted earnings per share was 60 cents as compared to net income attributable to group of 55.9 million and diluted earnings per share of $1.3 for the quarter ended September 30, 2022 as discussed the delayed California General rate case proposed decision and an adverse impact on that income attributable to group.
In central mass.
You had to pay a jujuy and key he fires.
Burnt about 3200 acres on the West side, you had the Lahaina fire, which was about 'twenty, one 'twenty 200 acres.
And while none of our systems were directly affected we do own the kind of quality of the top loading of <unk> systems.
Things are very very chaotic and I'm very happy to report that our employees follow the training, we do a lot of training for wildfire, while wildfire readiness, our water systems performed very very well, we've narrowed loss pressure and our systems during the fire.
And we did we did our job in terms of helping our customers protect their property by keeping their systems wet end of <unk> and the fire flows going toward the fire departments as they battle these fires.
Likewise, we were the only potable water provider on the west side of Maui for a number of days after the fire. So I just want to go.
Give kudos to the team for following their training and doing.
Doing an amazing job during a very chaotic and confusing time and I think we've all read in the press.
About the response from from from local government, which added to the confusion, but kudos to the team in Maui for doing such a great job.
David Healey: As noted at the bottom of the slide I'm pleased to report groups capital investments during the third quarter of 2023 was 96.9 million which was a 25% increase on the same period last year.
And liquidity in the company remained strong we maintain 16 $9 million of cash of which $34 million restricted we have short term borrowing capabilities of $485 million.
<unk> significant while we're waiting for the general rate case decision Theres no crunch on liquidity at the company.
Greg Milleman: and now I'll turn it over to Gregg Milleman to cover slides. Thank you, Dave. On slide seven, you can see as we've discussed in prior quarters, we have three unrequited California regulatory mechanisms that we are tracking.
And certainly with our capital program the way, it's going we don't see that slowing down anytime soon we did not sell any shares in the aftermarket or ATM program that we currently have in place.
And we don't anticipate anticipates really fond shares probably for the rest of the year and we'll see what the needs are as we go into 2024.
Greg Milleman: Our practice is not to record revenue revenue until the 2021 GRC amounts are known and approved by the commission. All of these mechanisms that Dave said are go back effective to January 1st, 2023. We have the largest interim race memo account tracks the difference between interim rates and our final rates. We have the moderate style revenue adjustment mechanism that tracks difference between actual residential sales revenue and residential sales revenue at a single quantity rate.
We've increased cash and cash equivalents and 32 excuse me increased at $32 $8 million from the collection of the Ram in TBA balances. We wanted to point that out because there were some analysts that were concerned about the collectability of the Ram when it went away we are continuing to collect that cash and clearly that is help enhance our cash position.
Year to date and during the third quarter. The other noteworthy item in the quarter is when you look at the third quarter of 2022, we had a $9 $3 million.
Greg Milleman: And then we have to drought response memo account that tracks difference in sales revenue. I'm sorry, tracks the difference in reduced sales revenue from conservation during a drought. This will stay open until California Governor's Gavin, California Governor Gavin Newsom declares the drought over which could happen in sometime in 2324 or depending on what happens with the weather in our state could stay open longer. Recovery from that will be by a separate filing and the safe indicated those revenues will not be recorded in in 23LB recorded once the commission approves that's final.
Unrealized loss on nonqualified benefit plan.
<unk> and then this year for the same period that was a positive $700000. So you can see the market go from what was really bad last year for these assets and stabilized and then have now become more productive and added $700000 in the other income and expense.
Going on to slide 16.
Dave mentioned earlier, the cost of capital adjustment mechanism performed as it's designed.
The mark to get Us from 10, one so October one to September 30 in a given year and it tracks the Moody's utility bond index and the changes in that bond index and when that bond. The next changes more than 100 basis points, we're allowed to file for and adjustments to our Aro.
Greg Milleman: Turning to slide eight. This is just gives you the financial impacts of three recorded regulatory mechanisms for the third quarter. Again, as Dave said, based on the current position of the party and the 21 GRC filing, we estimate the an understatement of operating revenues during the third quarter to be in the range of 14 to 27 million or 22 to 41 cent earnings per share. Something of note would be in the right before the sub total where it says MRAB, you will see that they are negative numbers.
50% of the change and so essentially the change from September 15 emission October one 2822 to September 32023 was 140 basis points.
So we have filed for.
A 70 basis point adjustment to our return on equity, which brings us to a 10.27 and an increase in our rate of return up to 7.46, our overall rate of return.
<unk> is the variable is in ratemaking.
Greg Milleman: This is right in line with what we would expect for the memorandum account when you go into the summer months. Customers are using water in the more extensive third and fourth tiers and the single quantity rate is more in line with the second tier. And so it's basically starting to annualize the numbers that we would expect for the year. Later on in the deck, we'll come across a slide that will show the same table with your faith results, and you'll see with almost three quarters of the year being completed. The numbers are coming in line with what we would expect on an annualize basis.
That's a tier two advice letter Thats been filed on October 13th we expect to get that approved here.
And sometime in early November and then that gives us the remaining time of the year to program the changes into the tariffs and habit effective for October one.
As Dave mentioned this will add approximately $10 million.
Two our income going into 2024.
Speaking of regulatory updates I am going to hand over to Greg Newman to give you an update on the California General rate case, Greg.
Okay.
Just for clarification.
Cost of capital adjustment that Marty mentioned, he said that October effective October 1st it'll actually be effective January one.
David Healey: That I will turn it back to you Dave. Thank you Greg. Moving to slide 9, additional Q3 2023 highlights is noted on the slide. 2024 operating revenue is expected to increase approximately $10 million from an increase in cow water to return on equity to 10.27%. That effective January 1, 2024. The increase was from the water costs of capital mechanism for the period from October 1, 2022 to September 30, 2023. We will discuss this in more detail later in the presentation.
Yes.
Unintentionally mentioned that.
Our state of that.
Moving right along with the California General rate case. The main point here is as you know.
Second quarter that a second judge was added to our case.
We have been getting information requests from the judges.
That are clearly demonstrating that they are working on the case and we're proceeding forward with.
<unk>.
The deadline that is currently set up.
To complete it by December 31, 2023.
Moving to slide 18.
David Healey: Also, Cal Water entered into an agreement with the California Department of Community Services and Development to help low income customers access funds through the state's low income household water assistance programs to pay monthly water bills. It's another example of our ongoing efforts to provide affordable water service to our customers.
And these are the other regulatory matters that.
We are proceeding with as you can see we have a application to increase our ability to raise capital by $1 3 billion to fund our capital program.
We also are seeking recovery.
The expenditures that we incurred related to the drought through those expenditures through the end of 2022 and then finally we.
David Healey: Moving to slide 10, we present our earnings per share bridge, which details the changes from 2022 third quarter earnings per share to 2023 third quarter earnings per share. Moving on to slide 11, year-to-date 2023 financial highlights. I was discussed earlier due to the delayed California General rate case. We estimate the adverse impact on the first nine months of 2023 operating revenues to be in the range from approximately 60 million to 93 million of which 16 million to 18 million is related to the dream of.
We completed filed and completed a rate case in Washington to increase some of our company revenues by $2 1 million just became effective.
I believe it was July 28 2023.
Moving to slide 19 on does that to Marty.
Yes, Thanks, Greg.
In terms of P fast.
<unk>, what's happening certainly there's been a ton of press over the last quarter about the settlement discussions that have been underway.
What the polluters and while no final settlement has been reached there clearly has been a lot of activity.
For US there is really no change in our in our <unk> program, we have a memo account on file with the commission.
That allows us to track our incremental costs associated with <unk> testing.
David Healey: Our estimate is based on the current positions of the parties to the California General Rate Case Filing and Conception Driven Mechanisms. As discussed earlier, we expect fee-to-use approval that the advice letter for 2023 DREAM operating revenue in 2024. As noted on the slide, operating revenue for the nine-month period ended September 30th, 2023 decreased 65.4 million to 580.1 million as compared to the same period last year. The decrease was primarily from the 48.8 million decrease in RAM and MCBA revenue as those revenue mechanisms concluded on December 31st, 2022, a 20 million increase in revenue deferred, and a 25.3 million decrease in build-meter revenue.
And then Wayne.
<unk> filed an application to modify.
That advice letter to allow us to track capital as well the significance of that is it allows us to start to work early and make the investments and when the regulations ultimately come into play.
And get approved we can apply for recovery at all.
Also I'd like to point out the $200 million that we estimate has been our COO.
Capital needs to treat T boss in the systems that we operate is incremental to the capital program that we talk about so the slides that we put in this deck as part of the rate case capital.
That we planned for and do in the ordinary course of business something like this and we have a change in regulation that requires incremental capital. It's just that it's incremental to the capital spending that we show on the rate case, hence we track it through with me advice letter process.
Slide 20.
Youll see.
David Healey: These three decreases were partially offset by general rate increases, a change in balancing accounts, and interest on the net grant MCBA. Third quarter operating expenses decreased 5.9 million to 538.2 million as compared to the same period last year. Overall, third quarter 2023 operating expenses were in line with expectations. The decrease was mostly due to a 16.4 million decrease in cost associated with revenue deferral, and a 3 million decrease in water production cost which was partially offset by increases 7.7 million employee labor costs and 3.2 million of amortization expense and 1.9 million of property and other taxes.
Where we are kind of year to date at $274 million again, that's a new nine month high for the company.
And we are on track going into the fourth quarter for a record capital investment year.
Again overall, we don't see the capital means slowing down anytime soon and anything that's used for <unk> treatment will be incremental to the numbers that you see on the slide Likewise this slide will get crude up when we get that when we get the final decision.
From the CPUC at least flat.
Flattish based on what we've asked for in the rate case and also what we have actually spent the last couple of years, we're going through the rate case process.
Looking at slide 21.
That investment flow through to our rate base is what our forecasted rate base looks like based on the current assumptions and again this will get true it up.
When we have a decision from the commission based on the 2021 general rate case.
So going to slide 22 in summary, kind of where are we.
Obviously, we're very happy that it's been a mild fire season, and we didn't sustain any damage to our systems and.
David Healey: Moving on to slide 12 financial results year-to-date 2023. For the nine-month period ended September 30, 2023, net income attributable to group was 21.7 million or 38 cents earnings for diluted common share compared to net income attributable to group of 76.4 million or $1.41 earnings per diluted common share for the nine-month period ended September 30, 2022. As discussed, our year-to-date results reflect the temporary absence of 2023 California General Rake rate release and revenue adjustments from regulatory mechanisms. As noted at the bottom of slide 12, group invested 274.1 million and infrastructure investment during the nine-month period ended September 30, 2023, which was a 23.4% increase in the same period last year.
In West Maui.
The cost of capital adjustment mechanism has put our ROE.
Starting in January one and Greg Thank you for that correction.
To 10 to seven we haven't had an ROE above 10.2 and at least the last couple of decades.
Capex continues to remain strong and there is.
Infinite places to put capital on the capital side of the business things are going well, obviously as I mentioned earlier the fog of the delayed in the general rate case can be very frustrating. The revenue shortfalls. We are experiencing is due to the temporary absence of regulatory mechanisms and we anticipate recognition of that revenue.
And those mechanisms when we have a decision from the California Public Utilities Commission like Greg I'm encouraged to see that.
Rate cases being worked on.
But I also know it's very frustrating when we have to wait for an administrative delays and it causes a lot of confusion in our financial reporting.
The current deadline for the commission that they have on file to conclude our 2021 General rate case is December 31, 2023, hopefully we will be.
David Healey: Moving to slide 13, which is the year-to-date unrequited California regulatory mechanisms details. It breaks out the revenue by the different regulatory mechanisms and Greg pretty much covered the details of these.
<unk>.
In addition to that as well.
We work to answer their questions on the 2021 rate case, we have been busy working on the 2024 rate case.
Which is going to be a big effort within the company.
And.
It's thousands and thousands and thousands of pages of documentation and testimony that gets filed so the team has been busy working on that and obviously, we are pushing forward with our <unk> programs to treat the wells that we have in our service territory that may show trace elements of those chemicals.
David Healey: So we're going to move on to slide 14, which is our year-to-date earnings per share bridge, which details the changes from year-to-date September 30, 2022 earnings per share to year-to-date September 30, 2023 earnings per share.
So christa with that we will open it up for questions. Please.
Martin Kropelnicki: And now I'll turn it over to Marty to cover slide. Thanks, Dave. Good morning, everyone.
Certainly if you would like to ask a question. Please press star one on your telephone keypad and if he would like to withdraw your question press the pound key.
Martin Kropelnicki: As we kind of go through the fog of the delayed rate case, and certainly having $60 to $90 million of revenue we can't record or $93 to $93 to $45 to share that we can't recognize real waiting for the rate case to be approved makes things complicated. There are certainly some additional highlights that I'd like to talk about for the quarter. First, as Dave just mentioned, our capital investment program year-to-date we're at a new high.
Your first question comes from the line of David Sutherland from Baird. Please go ahead.
Hey, guys. Good morning, and thank you for taking morning Davis.
Just going through the slide deck I noticed there was no update on the business development pipeline and just wanted to ask if this is a descent data being a big share.
Maybe a difference in how you guys are looking at this going into 2024.
Martin Kropelnicki: We are on track going into the fourth quarter to have a record capital investment year for group for 2023. And I just want to remind everyone that is really the basis in the foundation for which we grow future earnings. That continues to be strong. We've had a fairly, fairly mild summer out on the West Coast, along with the mild summer fire season, believe it or not, has been fairly mild as well with the exception of the fires that were experienced in West Maui.
That's fair.
No actually good question, Dave is no no change in how we look at 2020 for the business development pipeline.
Continues to be very very strong and the only real activity that we had in the third quarter was that we closed on the <unk> system, and we previously announced that and so obviously with the additional disclosures we wanted to put in the stack associated with the overhang of the rate case being late we just didn't think there.
Martin Kropelnicki: But overall, we have about another four weeks of fire season so far, knock on wood out on the West Coast. Things have been fairly tame and we look forward to getting fire season wrapped up this year and then planning for the 2024 fire, season. Looking at the West Maui fires, albeit the amount of acreage burned, it was 6,753 acres, which is not much at all, especially in California when we felt with wildfires that had been in excess of 400,000 acres burned.
There were a lot of substantial changes in the last 90 days.
And there were no new announcements really in the last 90 days of the <unk> system closing, we didn't want to use that space right. Now we thought that space for this discussion was better served talking about what are the effects of the delayed rate case, both on the revenue and EPS line.
Got it that's very helpful. Thank you very much.
The other question was just on the CPUC filing for one 2 billion of equity or debt.
The estimates on when this decision might come back.
Martin Kropelnicki: They were very devastating because it was an island. In Maui, the fires that took place in early August, there were really a series of three fires that were started, and it was really the perfect storm between a drought that they were having in the Lion Islands. Climate change, it's just been more dry and more arid, and then believe it or not, you had the remnants of hurricane and hurricane winds that came in that caused these fires to really take off.
Yeah.
Smooth.
And then maybe any changes due to the rising rates and by nature.
Thanks, guys and Greg Brad do you want to take that one.
I heard part of it and Thats the timing.
Application like that generally takes somewhere between six to 12 months. The process is generally very non controversial.
But the commission does have their process that they need to go through.
Martin Kropelnicki: In the upcountry, you had the Kuluha and the Alinda fire, and those were close to Pukalani system. In central Maui, you had the Peahui and the Kihei fires, they burned about 3,200 acres, and on the west side, you had the Lahaina fire, which was about 21, 2200 acres. And while none of our systems were directly affected, we do own the Khanat Pali, the Kapaloting of Pukalani systems. Things are very, very chaotic, and I'm very happy to report that our employees follow their training.
Yeah, and I'll come back on the second part of your question Davis.
You saw the cost of capital mechanism doing what it's designed to do and frankly I believe the cost of capital mechanisms very unique to California, I'm not aware of other states and have a cost of capital adjustment mechanism.
So when we're in an increasing interest rate environment that mechanism has helped in this is the second time, Ryan we had.
Second step up on our ROE from the increasing interest rate environment.
The application itself, we file this in the ordinary course of business, it's basically a shelf similar to the shelf that we filed with the Securities and Exchange Commission and basically the commission has authorized us to sell more debt and equity.
Martin Kropelnicki: We do a lot of training for wildfire and wildfire readiness. Our water systems performed very, very well. We've never lost pressure in our systems during the fire, and we did our job in terms of helping our customers protect their property by keeping their systems wet, and the fire clothes going for the fire department says that'll be fires. Likewise, we were the only possible water provider on the west side of Maui for a number of days after the fire.
For our needs in terms of financing our capital program in running the company. So it's an administrative step with the commission. They approve it and then we have to have a shelf on file with the SEC.
Not an indicator, we're going to go out and new a great big stock deal tomorrow or all of a sudden sell a bunch of new debt. It's basically use to do the financing needs of the company as we continue to grow our rate base and we have increasing rate base needs and then again I would just want to highlight that that cost of capital adjustment mechanism.
Martin Kropelnicki: So I just want to pause and get kudos to the team for following their training and doing an amazing job during a very chaotic and confusing time. I think we've all read in the press about the response from local government, which added to the confusion, but kudos to the team and Maui for doing such a great job. At liquidity in the company remains strong. We maintain $16, $9 million a cash, at which 34 millions restricted.
<unk> is working the way, it's designed to work and I think thats kind of a real benefit of California regulation and that we don't have to wait a couple of years to file for an increase in Roe.
Given the increasing interest rate environment, we're allowed to adjust that.
Every year based on the change in that Moody's utility Bond index.
Martin Kropelnicki: We have short-term borrowing capabilities of $485 million. That's significant while we're waiting for the general rate case decision. There's no crunch on liquidity at the company. And certainly with our Kapal program, the way it's going, we don't see that slowing down anytime soon. We did not sell any shares in the at-the-market or APM program that we currently have in place. And we don't anticipate really selling shares, probably for the rest of the year.
That's very helpful. Thanks for the time guys I appreciate it.
Thanks, David and have a good day.
Your next question comes from the line of Jonathan Reeder from Wells Fargo. Please go ahead.
Hey, good morning, Marty and team how are you guys.
Good morning, Jonathan how are you.
Oh, not too bad just getting into the swing of earnings now so.
Martin Kropelnicki: And we'll see what the needs are as we go into 2024. We've increased cash and cash equivalents from 32, excuse me, increased at $32.8 million from the collection of the RAM and MCBA balances. We wanted to point that out because there were some analysts that were concerned about the collectability of the RAM when it went away. We have continued to collect that cash and clearly that has helped enhance the cash position year-to-date and during the third quarter.
I know you made the filing to increase the ROE under the water cost of capital mechanism have any.
Intervenors opine on that increase or by what date, most intervenors weigh in if they want to.
Jonathan Thank you.
Yes, Jonathan No no one has intervened at this point in time, we filed in October 13, and Intervenors have 20 days.
Martin Kropelnicki: The other note where the item in the quarter is when you look at the third quarter of 2022, we had a $9.3 million unrealized loss on non-qualified benefit plan investments. And then this year for the same period, that was the positive $700,000. So, you know, you see the market go for what was really bad last year for these assets to stabilize. And then I have now become more productive and added $700,000 in the other income expense.
So that would.
Number seven.
Right.
But its 20 days.
October 13th I did the math.
I think it would be more like <unk>.
November 3rd and fourth.
Gotcha Okay.
And Greg.
That's a tier two advice letter correct, yes.
Yes, it's a tier two advice letter, which.
Martin Kropelnicki: Go on on to slide 16. As Dave mentioned earlier, the cost of capital adjustment mechanism performed as it's designed. The mark period is from 10-1, so October 1st to September 30th in a given year, and it tracks the moody utility bond index and the changes in that bond index. When that bond index changes more than 100 basis points, we're allowed to file foreign adjustments to our ROE 50% of the change. So essentially the change from October 1st, 2022 to September 30th, 2023 was 140 basis points.
We're a water division approves it they.
They make sure that we follow the rules of the water cost of capital adjustment.
Adjusted mechanism.
In our <unk>.
Approved tariffs and then basically they also make sure we did the math right.
The extent of it.
Yes.
Gotcha Okay.
Can you talk about maybe the strategy for the next cost of capital application I believe it would be due due to be filed next year.
In theory as their interest in <unk>.
Trying to extend the current parameters given the 2022 to 'twenty to 'twenty four application just recently got a final order.
Martin Kropelnicki: So we have filed for a 70 basis point adjustment to our return on equity, which brings us to a 10.27 and an increase in our rate of return to 7.46, our overall rate of return. ARR as the variable is in rate making. That's a tier 2 advice letter that's been filed on October 13th. We expect to get that approved here in sometime in early November, and then that gives us the remaining time of the year to program the changes into the tariffs and have it affected for October 1st. As Dave mentioned, this will add approximately $10 million to our income going into 2024.
We are currently discussing that with the other three water companies that are also however.
Suppose the filed May one 2024.
At this point, we haven't settled on a strategy.
Okay.
Alright.
I think that's it for my questions at this point as we continue to await the.
The PD so that at least sounds good if the ALJ is or are coming back to you guys for your information requests and.
It's consistent with them certainly working on the case, but hopefully bumping it up so good luck with that.
Thank you. Thank you.
Thanks, Jonathan.
Your next question comes from the line of Angie <unk> from <unk>. Please go ahead.
Greg Milleman: Speaking of regulatory updates, I'm going to hand over to Greg Millman to give you an update on the California and general rate case, Greg. Okay, just for clarification, the cost of capital adjustment that Marty mentioned, he said effective October 1st, it will actually be effective January 1st. I think you know, an intense green mentioned that. First thing to that, moving right along with the California general rate case. The main point here is, as you know from the second quarter, that a second judge was added to our case, and we have been getting information requests from the judges that are clearly demonstrating that they're working on the case and in proceeding forward with hopefully the deadline that's currently set up to complete it by December 31st, 2023.
Thank you.
Just.
Going back to that slide slide, which basically attempts to bridge.
To date results with them.
They would have been had.
The commission actually made a decision so slide 13, so can I ask this big range for this first line for Irma right 112.
Versus <unk> five well.
St Epic range, so what is it.
Is it some.
Why is there a range here I mean, if you could just explain it to me from Oh, My God I mean, there is a partial settlement in the case. So just again front I understand why the range is PFS.
Certainly.
The partial settlement really was basically on rate design matters.
Greg Milleman: Moving to slide 18. These are the other regulatory matters that we are proceeding with. As you can see, we have an application in to increase our ability to raise capital by 1.3 billion to fund our capital program. We also are seeking recovery of expenditures that we incurred related to the drought through those expenditures through the end of 2022. And then finally, we completed a rate case in Washington to increase our company revenues by 2.1 million just became effective. I believe it was July 28, 2023. Moving to slide 19, I'll give it back to you Marty.
Did not address any of the capital projects that we included in the program and it did not address the disputed expense items O&M expense items that we had in the case and so the the high range is what we filed in our application that would be our position and the low.
Range is what the consumer advocates group.
They felt that we should.
Achieve so that's really the big reason for the range that the settlement was not.
Not a lot of items settle then it was not a lot of revenue requirement either as far as basically no revenue requirement items.
Okay.
Okay and then the.
The dream at <unk>, you mentioned that that's going to be decided in 2024 alright. So.
Martin Kropelnicki: Thanks, Greg. In terms of PFAS regulation and what's happening, certainly there's been a ton of press over the last quarter about the settlement discussions that have been underway with the polluters. And well, no final settlement has been reached. There has been a lot of activity. For us, there's really no change in our PFAS program. We have a memo account on file with the commission that allows us to track our incremental costs associated with PFAS testing.
I guess it all depends landed 24, but is it fair to assume that we should just move that decision or that earnings stream from 'twenty three earnings to 24 what.
What is the decision defense as Nate and I don't know January and February would that still be allocated the 23.
I think Dave you need to answer that one yes. So the.
The way that the advice letter.
Filing process works.
Martin Kropelnicki: And then we file an application and modify, that advice letter to allow us to track capital as well. The significance of that is it allows us to start to work early, make the investments and when the regulations ultimately come into play and get approved, we can apply for recovery. I also would like to point out the 200 million that we estimate as being our capital needs to treat PFAS and the systems that we operate is incremental to the capital program that we talk about.
As we.
We're going to get.
We get a proposed decision.
It's going to be finalized at the end of the year and then we would.
Per the advice letter filing in the first quarter of 2024 and its a tier three filing.
Which would take several months.
Okay to get approval, so it's going to be towards the end.
Second half of 2024 so.
It will not be reported in 2023.
Martin Kropelnicki: So the slides that we put in this deck is part of the rate case capital that we plan for and do an ordinary course of business. Something like this, we have a change in regulation that requires incremental capital. It's just that it's incremental to the capital spending that we show in the rate case. Hence we track it through the advice letter process. It's like 20, you'll see where we are kind of year to date that 274 million dollars.
Okay and then just.
I'm jumping like that the filing with.
The permission to issue.
A mixture of equity and bonds is it fair to assume that I assume that.
Listen the equity component is equivalent to the that you'd be allowed equity ratio I mean, so basically roughly 53% of that would be equity.
Yes, that's a good assumption.
Martin Kropelnicki: Again, that's a new nine month time for the company and we are on track going in the fourth quarter for record capital investment year. Again, overall, we don't see the capital needs flowing down anytime soon and anything that's used for PFAS treatment will be incremental to the numbers that you see on this slide. Likewise, this slide will get screwed up when we get the final decision from the CPUC. The slide is based on what we've asked for in the rate case and also what we have actually spent the last couple years will going through the rate case process.
Okay, and then lastly, what.
And I should be able to inherit from from the earnings walk but.
What's the drag the drag associated.
Is that all associated with <unk>.
Performance of your non qualified pension plans.
Okay.
Maybe not the year over year, maybe what's the absolute number.
Yes.
I think we have the details and slides.
Martin Kropelnicki: Looking at slide 21, that investment flow through to our rate base. This is what our forecast rate base looks like based on the current assumptions. And again, this will get screwed up when we have a decision from the commission based on the 2021 general rate case.
Slide 15.
Are you referring to.
Okay.
Do you see that where we have an unrealized loss in 2022 versus the unrealized gain in 2020.
Martin Kropelnicki: So going to slide 22 in summary, kind of, where are we? Obviously, we're very happy that it's been a mild fire season and we didn't sustain any damage to our systems in West Maui. The cost of capital adjustment mechanism has put our ROE starting in January 1 and Greg, thank you for that correction. At 10.27, we haven't had an ROE above 10.2 and at least the last couple decades. CapEx continues to remain strong and there's infinite places to put capital.
Okay.
Okay. So those are not year over year numbers, those actually actual numbers okay.
Go ahead.
Good and then maybe one more.
So.
Again, I know that if we're still waiting for the Trc decision, but you now have presumably the visibility into the higher Roe.
We you guys raised the dividend this year relatively little by only 4% is there.
Assuming that that was sort of that.
Martin Kropelnicki: So on the capital side of the business, things are going well. Obviously, as I mentioned earlier, the fog of a delayed and the general rate case can be very frustrating. The revenue shortfalls we are experiencing is due to the temporary absence of regulatory mechanisms and we anticipate recognition of that revenue and those mechanisms when we have a decision from the California Public Utilities Commission. Like Greg, I'm encouraged to see that the rate case is being worked on, but I also know it's very frustrating.
It's a transitory issue so.
Should we expect that you know that.
Dividend increases will go back to that historical cadence or I mean are.
We.
Simply a different interest rate environment and that somehow low.
Suppressed the dividend growth going forward.
Our overall strategy is to have and keep our payout ratio between 50% to 60% and we have stayed kind of well within that range obviously.
Martin Kropelnicki: Well, we have to wait for administrative delays and it causes a lot of confusion in the financial reporting. The current deadline for the commission that they have on file to conclude our 2021 general rate case is December 31, 2023. So hopefully we will be near the end. In addition to that, you know, as we work to answer their questions on the 2021 rate case, we have been busy working on the 2024 rate, case, which is going to be a big effort within the company.
With a growing capital program right. There, there's always the need to finance that program and when you when you pay a dividend it takes away from your ability to to help pay for that program. Nonetheless, I think we recognize that we are a total return type of stock in the company has had a long history of increasing its dividend.
And every single year.
So I would look at two things I think the financials right now and that's why I use the fog of the delayed rate case, it's very foggy, it's hard to see because as you just pointed out we have estimates.
Martin Kropelnicki: And you know, it's it's thousands and thousands and thousands of pages of documentation and testimony that gets filed. So the team has been busy working on that. And obviously we are pushing forward with our PFO, PFO programs to treat the wells that we have in our service territory. And these should create elements of those chemicals.
We're giving you had kind of the goalposts of where we think the decisions that have come out, but we ultimately don't know, but certainly when we when we book everything and get everything kind of caught up from the delayed rate case.
The fog starts to go away and you will see what the financial statements look like.
I do not expect the company to deviate from its policy of increasing the dividend every year I think that will likely continue. The question is how much and obviously we are in a rising interest rate environment your risk free rate of return.
Krista: So, Christa, with that, we will open up for questions, please. Certainly. If you would like to ask a question, please press star one on your telephone keypad. And if you would like to draw your question, press the pound key.
It was now at four 4% or above depending on what what duration bonds are looking at and what type of bonds you're looking at.
Davis Sunderland: Your first question comes from the line of Davis Sunderland from Beard. Please go ahead. Hey, guys, good morning. Thank you for taking my time, Davis. Just go through the slide deck. I noticed there was no update on the business development pipeline. I'm just trying to ask if there's something there being a good share, or maybe a difference in how you guys are looking at this, going into 2024 or anything about that.
I'm also acutely aware that that compound annual growth rate of our the CAGR number associated with our dividend growth helps drive stock valuation so.
It's hard to say right now but look.
I would anticipate a dividend increase next year consistent with the history of the company for the last 70 years.
The question will be kind of how much and it was the rate case concluded and I don't think were prepared to say more than that right now but.
David Healey: Now actually a good good question, Davis. No, no change in how we look at 2024, the business development pipeline continues to be very, very strong. The only real activity that we had in the third quarter was that we closed on the strobe system and we previously announced that. And so obviously with the additional disclosures we wanted to put in this deck associated with the overhang of the Ray case being laid, we just didn't think there were a lot of substantial changes, you know, in the last 90 days that we, you know, and there were no new announcements really in the last 90 days of the meds strobe system closing.
History will repeat itself I think with Cal water. It's just a question on what size increase lobbying.
Okay.
The comments that was the last question, but now just one more.
So you guys did.
Numerous well numerous a couple of acquisitions.
You know that.
So the question on basically half as that started to kind of continue at this higher financing environment.
Is there more of them.
Focusing on organic growth again, that's not.
David Healey: We didn't want to use the space right now. We thought that space for this discussion was better served talking about what are the effects of the delayed Ray case both on the revenue and EPS line. Got it. And those are very helpful. Thank you very much.
A question I think you will hear from investors across.
The utility space again.
PFS would potentially give you this incremental organic growth, but again.
Greg Milleman: And then my only other question was just on the soupy, soupy filing for the 1.3 billion equity events. Any estimates on when you're specific might come back or if it's just the, if you need to see the trends of the deployment, you're going to be able to change this due to the rising rates and by nature. Yes, any other thoughts there would be helpful. Thanks guys.
Strategically speaking is there a shift towards organic growth and away.
From.
Kind of M&A.
Yes, I think I'll kind of pull in our annual report that we have for this year setting the helm right I mean certainly.
Greg Milleman: Greg, Greg, you want to take that one? I heard part of it and that's the timing. Application like that generally takes somewhere between six to 12 months of process. It's generally very non-controversial, but the commission does have the process that they need to go through. Yeah, and I'll come back on the second part of your question, Davis. You know, you saw the cost of capital mechanism due what it's designed to do.
It's been a turbulent market I think the last 18 months to two years.
Your interest rates two years ago, we could borrow money at sub one half of 1% and now our borrowing rates stable at six 5% on the line.
Alright.
Eight plus stable issuer.
So it means the cost of capital is going up.
And I think it's going to shake out buyers and sellers.
Greg Milleman: And frankly, I believe the cost of capital mechanisms, very unique to California. I'm not aware of other states and have a cost of capital adjustment mechanism. So when we're in an increasing interest rate environment, that mechanism has helped. And this is the second time, right? We had a second step up on our ROE from the increasing interest rate environment. So the application itself, we file this in the ordinary course of business.
Having said that we've always been kind of value focused on our buys and I think as as deals may slow down a little bit we're always going to be out there looking for those systems that we can bring onto our platform.
<unk> service and hopefully bring new capital into our system that may be it may be under invested so I remain optimistic on the M&A side, I think it might slow down a little bit.
Greg Milleman: It's basically a shelf, similar to the shelf that we file with the Secures and Exchange Commission. And basically, the commission is authorizing us to sell more debt and equity for our needs in terms of financing our capital program and running the company. So it's an administrative step with the commission, they approve it, and then we have to have a shelf on file with you. SCC. It's not an indicator we're going to go out and do a great big stock deal tomorrow or all the sudden sell a bunch and you get it's basically used to do the finance and needs of the company as we continue to grow our rate base and we have increasing rate base needs.
And to the question Davis asked earlier, we Didnt include that slide this quarter, because we just had the one system close this growth quite system in Washington that was about 900 connections. It doesn't mean, our pipeline is spend out any it just means we haven't had any new announcements come out in the last 90 days in.
We have a very good business development team. Some of you may have seen we promoted shimon Patel and of that rollout.
Leading that as our Chief development Officer, and Thats, a full time job and I think we will continue to look for strategic deals.
Greg Milleman: And then again, I would just want to highlight that that cost of capital adjustment and mechanism, you know, is working the way it's designed to work. And I think that's kind of a real benefit of California regulation in that we don't have to wait a couple of years to file for an increase in R.O.E, given that increasing interest rate environment. We're allowed to adjust that every year based on the change in that moodies utility bond index.
That will be accretive in again.
We have to get to this fog of the delayed rate case, but we have a very strong balance sheet and sometimes when the market gets tough you find better opportunities. So we're going to be out there looking and continuing to look.
And if you would like to ask a question. Please press star one on your telephone keypad.
Davis Sunderland: Thanks for the time, guys. Appreciate it. Thanks, Davis. Have a good day.
We have no other questions in the queue at this time I will now turn the call over to Marty crippling crumble, Nikki Chairman and CEO for closing remarks.
Jonathan Reeder: Your next question comes from the line of Jonathan Reeder from Wells Fargo. Please go ahead. Hey, good morning, Marty and team. How are you guys? Good morning, Jonathan. How are you? Oh, not too bad. Just getting into the swing of earnings now. So, I know you made the filing increase that, you know, the R.O.E, under the water cost of capital mechanism. Have any interveners of time on that increase or, you know, by what date must interveners weigh in if they want to?
Great Chris that thanks, everyone for calling in on the call today and thanks for staying with US as we go through this delayed rate case.
Hopefully we are getting to the end here as Greg mentioned and we get this thing kind of wrapped up because certainly as we go into 2024, we have some big things we wanted to accomplish.
That's it for now we will look forward to reporting our yearend results.
Jonathan Reeder: Jonathan, thank you. Yeah, Jonathan. No, no one is intervened at this point in time. We filed it October 13th and the interveners have 20 days. So that would be November 7th. I believe I did the math right. But it's 20 days from October 13th. I did the math. I think it'd be more like November 4th. Gotcha. Okay. That's a tier two advice letter, correct? Yeah, it's a tier two advice letter, which is where water division approves it.
End of February until then please be safe and we'll look forward to talking to you really soon thank you.
This concludes today's conference call. Thank you for your participation and you may now disconnect.
Yeah.
[music].
Jonathan Reeder: They make sure that we follow the rules of the water cost of capital. So, adjusted mechanism in our approved tariffs. And then basically they also make sure we did the math right, but that's about the extent of it. Gotcha. Okay.
Yes.
Yes.
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Sure.
Yes.
Jonathan Reeder: Can you talk about, you know, maybe the strategy for the next cost, the capital application, I believe, you know, it would be due to be filed next year. So, you know, if you're in theory, is there interest in, you know, trying to extend the current parameters given, you know, the 2022 to 2024 application, you know, just recently got a final order. We are currently discussing that with the other three water companies that are also supposed to file May 1st of 2024. And at this point, we haven't settled on a strategy. Okay.
Yeah.
Yes.
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Yes.
Sure.
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Okay.
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Jonathan Reeder: All right. I think that's it for my questions at this point, as we continue to await the PD. So that, that at least sounds good if the ALJs are coming back to you guys for informational requests and, you know, it's consistent with them. Certainly working on the case, but hopefully buttoning it up. Good luck with that. Thank you. Great. Thanks Jonathan.
Sure.
[music].
Okay.
Agnieszka Storozynski: Your next question comes from the line of Angie Storozynski from Seaport. Please go ahead. Thank you. So just, you know, going back to that slide, which basically attempts to bridge your, your, your state results with, you know, what they would have been had the commission actually made a decision for slide 13. So can I ask the, the big range for, for the first line, for Irma, right, 1.1 to, you know, versus 0.5, I mean, well, say a big range.
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Okay.
Okay.
Thank you.
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Yes.
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Agnieszka Storozynski: So what is it, is it, why is there a range here? I mean, if you could just explain it to me from, from like, I mean, there is a partial settlement in the case. So just again, so I understand why the range is here.
Greg Milleman: Certainly. The partial settlement really was basically on rate design matters. It did not address any of the capital projects that we included in the program, and it did not address the disputed expense items, oh, and I'm expense items that we had in the case. And so the, the high range is what we filed in our application. That would be our position. And the low range is what the consumer advocates group, what they felt that we should achieve. So that, that's really the big reason for the range. The settlement was not a lot of items settled, and it was not a lot of revenue requirement items, or is basically no revenue requirement items settled.
Sure.
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Yes.
Okay.
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Okay.
David Healey: Okay. And then the, the, the dream outline, right? So you're mentioning that that's going to get be decided in 2024, right? So, so, I guess it all depends when in 24, but as it says to some, that we should just move that decision or that earnings stream from 23 earnings to 24. What if the decision is, for instance, made in, I don't know, January or February? Would that still be allocated to 23?
Okay.
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Yes.
Okay.
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David Healey: I think Dave, you would need to answer that one. Yeah. So the, the way that the advice letter filing process works is we, we're going to get, if we get a proposed decision, that's going to be finalized at the end of the year, and then we would prepare the advice letter filing in the first quarter of 2024, and it's a tier 3 filing, which would take several months to get approval. So it's going to be toward the end of the second half of 2024.
David Healey: So it will not be reported in 2023. Okay.
Yes.
<unk>.
Yes.
Okay.
Yes.
Okay.
Yes.
Yes.
Okay.
Thank you.
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Agnieszka Storozynski: And then I'm jumping like that. But the filing with, you know, the permission to issue a mixture of equity and bonds, is it fair to assume that I assume that basically equity component is equivalent to the, that it allows equity ratio. I mean, so basically roughly 53% of that would be equity.
Agnieszka Storozynski: Yeah, that's a good assumption. Okay, and then lastly, what again, you know, I should be able to infer it from the earnings walk, but what's the drag, you today drag associated or at all, associated with the performance of your non-qualified pension fund? Maybe not the year of a year, maybe what's the absolute number? I think we have the details and slide 15, are you referring to the, you see that where we have unrealized loss in 2022 versus the unrealized year in 2023? Okay, okay, I see it. Okay, so those are not the year of a year numbers, those are actually actual numbers.
Sure.
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Okay.
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Yes.
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Agnieszka Storozynski: Okay, good, and then maybe one more. So, again, I know that we're still waiting for the DRC decision, but you now have presumed the visibility into the high ROE. You guys raised the dividends this year relatively little, right, only 4%. Is there, I mean, I'm assuming that that was sort of a, you know, a transitory issue. So, should we expect that, you know, that the dividend increases will go back to the historical cadence, or I mean, are we in a different interest rate environment, and that somehow will, you know, suppress the dividend growth going forward?
Okay.
Yes.
Okay.
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Okay.
Yes.
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Okay.
Yes.
Yeah.
Yes.
Agnieszka Storozynski: You know, our overall strategy is to have our, and keep our pet ratio between 50 to 60 percent, and we have stayed kind of well within that range, obviously, with the growing capital program, right, there's always the need to finance that program, and you know, when you pay a dividend, it takes away from your ability to help pay for that program. And then the last, I think we recognize that we are a total return type of stock, and the company is at a long history of increasing its dividend every single year.
Yes.
Okay.
Thank you.
[music].
Agnieszka Storozynski: So, I will look at two things. I think the financials right now, and that's why I use the FOG of the delayed rate case. It's very FOG, it's hard to see because, as you just pointed out, we have estimates, and we're giving you kind of a goal post of where we think the decisions are going to come out, but we ultimately don't know. But certainly, when we book everything, and get everything kind of caught up from the delayed rate case, the FOG starts to go away, and you'll see what the financial statements look like, and, you know, I do not expect a company to deviate from its policy of increasing the dividend every year.
Agnieszka Storozynski: I think that will likely continue. You know, the question is, is how much? And obviously, we are in a rising, integrating environment, your risk-free rate of return. You know, it was now at 4% or above, depending on what duration bond you're looking at, and what type of bond you're looking at. I'm also acutely aware that that compound annual growth rate, or the tager number, associated with their dividend growth, helps drive stockpacks.
Martin Kropelnicki: Regulation. So it's hard to say right now, but look, you know, I would anticipate a different increase next year, consistent with the history of the company for the last, you know, 70 years. The question will be kind of how much and it is the rate case concluded. I don't think we're prepared to say more than that right now, but, you know, history will repeat itself. I think we'll count water.
Agnieszka Storozynski: It's just a question. But what size increase will it be?
Martin Kropelnicki: Okay, and I know that I promised that was the last question, but now just one more. So you guys, you know, the numerous, well, numerous, a couple of acquisition. You know, that's the question the question I'm basically have is that strategy can I continue in this higher financing environment. Is there more of, you know, refocusing on organic growth? Again, that's, you know, a question I think we hear from investors across the utility space.
Martin Kropelnicki: Again, not, you know, as you said, PFAS will potentially give you this incremental organic growth. But again, you know, like strategically speaking, you know, is there a shift towards organic growth and a way of from the company?
Martin Kropelnicki: Yeah, you know, I think I'll kind of pull in our annual report that we have for this year, study the helm, right? I mean, certainly. It's been a turbulent market. I think the last 18 months, the two years, you know, interest rates, you know, two years ago, we could borrow money at sub one half of one percent. And now we're borrowing right to table what it's six and a half percent on the line.
Martin Kropelnicki: You know, we're a, we're a, we're a, you know, A plus stable, you know, issuer. So, you know, it means the cost of capital is going up. And I think it's going to shake out buyers and sellers having said that Angie, we've always been kind of value focused on our buys. And I think as, you know, deals may slow down a little bit. We're always going to be out there looking for those systems that we can bring on to our platform, improve service. And, you know, hopefully, you know, bring new capital into a system that maybe, maybe under invested. So I remain optimistic on the M&A slide. I think it might slow down a little bit.
Martin Kropelnicki: And to the question, Davis asked earlier, we didn't include that slide the squirt because we just had the one system closed, the strokes, quit system in Washington. That was about 900 connections. It doesn't mean our pipeline has been out any, it just means we haven't had any new announcements come out in the in the last 90 days. And we have a very good business development team. Some of you may have seen we promoted Schillin Patel ended that role as a leading as a chief development officer.
Martin Kropelnicki: And that's a full-time job. And I think we will continue to look for strategic deals that will be creative. And again, you know, we, you know, we have to get to this fog of the delayed rate case. But, you know, we have a very strong balance sheet. And sometimes in the market gets tough, you know, you find better opportunities. So we're going to be out there looking and continuing to look.
Krista: And if you would like to ask a question, please press star one on your telephone keypad. We have other questions in the queue at this time.
Martin Kropelnicki: I will now turn a call over to Marty Kropelnicki, Kermann and CEO for closing remarks. Great, Chris Beth. Thanks everyone for calling in on the call today and thanks for staying with us as we go through this delayed rate case. Hopefully we are getting to the end here. As Greg mentioned, and we get this thing kind of wrapped up because certainly as we go into 2024, we have some big things we want to accomplish.
Martin Kropelnicki: That's it for now. We'll look forward to reporting our year-end results the end of February and tell them please be safe and we'll look forward to talking to you really soon. Thank you.
Krista: This concludes today's conference call. Thank you for your participation and you may now disconnect.
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