SJW Group (NYSE:SJW) Q3 2023 Earnings Call Transcript

SJW Group (NYSE:SJW) Q3 2023 Earnings Call Transcript October 30, 2023

SJW Group beats earnings expectations. Reported EPS is $1.13, expectations were $0.94.

Operator: Ladies and gentlemen, thank you for standing by. And welcome to the SJW Group Third Quarter 2023 Financial Results Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would like now to turn the conference over to Andrew Walters, Chief Financial Officer and Treasurer. Please go ahead.

Andrew Walters: Thank you, Operator. Welcome to the third quarter 2023 financial results conference call for SJW Group. I will be presenting today with Eric Thornburg, Chair of the Board, President and Chief Executive Officer. For those 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 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.

An aerial view of a city, highlighting the vital role of the company in providing necessary raw water and wastewater services.

Many factors could cause the company’s actual results and performance to differ materially from those expressed or implied by the forward-looking statements. For a description of some of the factors that could cause actual results to be different from statements in this presentation, we refer you to the financial results press release and our most recent Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission, copies of which may be obtained on our website. All forward-looking statements are made as of today and SJW Group disclaims any duty to update or revise such statements. You will have the 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 January 22, 2024.

You can access the press release and the webcast at our corporate website. I will now turn the call over to Eric Thornburg. Eric?

Eric Thornburg: Welcome, everyone, and thank you for joining us. I am Eric Thornburg and it is my honor to serve as Chair, President and CEO of SJW Group. As we progress through the second half of 2023, I am pleased to report that the strong momentum of the first half of the year continues. We remain focused on advancing our strategy and in this quarter we were able to achieve important milestones towards this goal. These include securing constructive regulatory outcomes across our local operations, such as an increase in the Water Infrastructure and Conservation Adjustment in Connecticut and the approval of the reimplementation of the Water Conservation Memorandum Account in California, achieving 12% customer growth year-over-year in Texas.

Since 2007, Texas Water has more than quadrupled its number of customers, serving more than 28,000 connections today, investing $196 million in water and wastewater utility infrastructure year-to-date through the end of the third quarter or 77% of our $255 million 2023 capital expenditure plan, which includes solar energy investments that lower operating costs and reduce greenhouse gas emissions and delivering earnings per diluted share of $1.13 in the third quarter and $2.09 year-to-date. I am pleased to share that our successful execution of our growth strategy, together with the implementation of initiatives to address anticipated challenges, as well as partial usage recovery in California and Texas, have allowed us to increase our 2023 guidance range to $2.65 to $2.70 of net income per diluted share.

Before we go on, I would like to take a moment to comment on the reimplementation of the WCMA, which was approved earlier this month. The California Public Utilities Commission recognized the ongoing water supply challenges in the San Jose area when it authorized the reimplementation of the WCMA and WCEMA to include the voluntary water conservation request of our water wholesaler, Valley Water. Rainfall in 2023 has been plentiful by California standards, but challenges continue in Santa Clara County. Valley Water’s largest reservoir is at less than 3% of its storage capacity and will be for 10 years as the dam is strengthened against earthquakes. Maintaining the momentum that our customers have made in water conservation during recent droughts will serve us all well in the future.

As we move towards the end of 2023 and into the new year, we will continue to execute on the key elements of our growth strategy. We expect future earnings growth will be driven by our commitment to managing operating expenses, continued investment in maintaining and improving our water supply and infrastructure, as well as constructive regulatory outcomes across our operations, including the California water cost of capital mechanism, system improvement charge in Texas, and general rate cases and infrastructure investment surcharges in Connecticut and Maine, all of which we will discuss during this call. For now, Andrew will review our financial results and regulatory updates in our state operations. Andrew?

Andrew Walters: Thank you, Eric. This morning, prior to the market opening, we released our third quarter 2023 operating results. The quarter-over-quarter comparisons between 2023 and 2022 operating results are affected by and reflect the delay in San Jose Water Company’s 2022 to 2024 general rate case decision. As a reminder, while the California Public Utilities Commission approved the settlement agreement and San Jose Water recorded the authorized revenue increase from the general rate case in the fourth quarter of 2022, the revenue increase was retroactive back to January 1, 2022. This delay in recognizing the revenues authorized in the general rate case affects the quarter-over-quarter comparisons through 2023. In the third quarter, we reported revenue of $204.8 million and net income of $36.2 million or diluted EPS of $1.13 per share.

This compares to 2022 quarterly revenue of $176 million, reflecting a 16% increase and net income of $25 million, reflecting a 45% increase or diluted EPS of $0.82 per share, reflecting a 38% increase. Operating results for the third quarter were affected by weather conditions across multiple operations with partial demand recovery in California and Texas. In California, the end of the declared drought emergency and mandatory conservation ended our use of certain revenue protection mechanisms on April 11, 2023. As noted by Eric earlier, San Jose Water Company was notified in early October that the CPUC has approved our request to re-implement the temporary regulatory revenue protection mechanisms, the WCMA and WCEMA that were in place during the declared drought emergency.

The use of these mechanisms is retroactive back to April 20, 2023. The benefit of the restored revenue protection mechanisms will not be reflected in operating results until the fourth quarter. I will discuss in greater detail shortly. We continue to see reduced water usage in Maine due to wet weather and lower industrial usage, while in California and Texas demand partially recovered in the third quarter. In Connecticut, revenues were not impacted by increases or decreases in water usage because of the water revenue adjustment mechanism. As you can see, the quarter-over-quarter increase in diluted earnings per share for Q3 2023 was primarily driven by rate filings of $0.62 per share, which I will break down for you shortly, and $0.19 related to higher water usage partially driven by end of the mandatory water conservation in California.

Partially offsetting the quarter-over-quarter increase was a $0.21 per share increase in water supply cost, $0.12 in income tax expense and $0.09 in regulatory mechanisms, as well as increased interest expense. Now a breakdown of the increase in revenue compared to the third quarter of 2022. The revenue increase was mostly driven by $22.6 million in cumulative rate filings and 8.3 million due to higher usage. The total includes California’s third quarter 2023 revenue increase in the 2022 portion of the general rate case that was approved in Q4 2022. Water Infrastructure and Conservation Adjustment increase in Connecticut that was effective in Q2 2023 and a temporary rate increase authorized in Maine in Q3 of 2023. The revenue increase was partially offset by a $3.2 million decrease in regulatory mechanism adjustments primarily from the end of the drought declaration in California.

There was a slight decrease or I am sorry, a slight increase in water production expense when compared to the third quarter of 2022. The increase was largely driven by $10 million in water supply cost primarily related to a rate increase from our water supply wholesaler and a $1.4 million due to the higher customer usage. Partially offsetting the increased expenses was $2.4 million decreased from surface water mix and regulatory adjustments. The 1% increase in total other operating expenses compared to our prior year was primarily driven by depreciation and amortization and taxes other than income taxes. The increase was partially offset by reduced expenses. A significant portion of this reduction is due to San Jose Water Company’s continued focus on the maturity of the advanced asset management program, which includes condition monitoring and assessments, proactive planned asset replacement versus a run-to-failure approach and early detection technologies.

Additionally, advances in San Jose Water Company’s leak detection technology deployed in the field, as well as advanced leak detection capabilities of field crews have enabled the company to detect and repair leaks sooner, avoiding significant costs associated with larger emergency main breaks in the distribution system. As mentioned earlier in the call, the benefit of the restored revenue protection from the WCMA and WCEMA mechanisms is not reflected in our financial reporting from April 11, 2023 through September 30, 2023. Year-to-date, we reported revenue of $499 million and net income of $66 million or diluted EPS of $2.09 per share. This compares to 2022 year to date revenue of $449.3 million, reflecting an 11% increase and net income of $40.3 million, reflecting a 64% increase or diluted EPS of $1.33 per share, reflecting a 57% increase.

As you can see, the year-to-date increase in diluted earnings per share for 2023 was primarily driven by rate filings of $1.52 per share in California and Maine and a WICA increase in Connecticut that were approved after the third quarter of 2022. There were also increases due to the release of income tax reserves and one-time trope of our Cupertino concession that occurred in 2022. Partially offsetting the increase was higher water supply costs of $0.60 per share, interest expense of $0.19 and non-recurring $0.15 gain on the sale of non-utility property in the year-to-date 2022. Approximately $77 million has been raised in the first nine months through our at the market program. $50 million is for general corporate purposes and the additional amount was raised for acquisitions that closed in the third quarter.

At the end of the quarter, we had approximately $222 million available and approximately $128 million drawn on our bank lines of credit for short-term financing of utility plant additions and operating activities. The average borrowing rate for the line of credit advances during the first nine months was approximately 6.16%. The average borrowing rate for the same period in 2022 was approximately 2.79%. The effective consolidated tax rates for the first nine months ended September 30, 2023 and 2022 were approximately 6% and 8%, respectively. A 2024 WCCM adjustment was triggered on September 30, 2023, which will be effective in January. The return on equity adjustment will be 70 basis points and the implementation will be handled through the advice letter process.

On October 13, 2023, San Jose Water filed the letter numbers 601 to trigger the 2024 WCCM. The company expects to file a separate advice letter on or about December 1st to implement new rates that reflect a WCCM adjusted return on equity of 10.01%, less a 20-basis-point reduction due to the restoration of the Water Conservation Memorandum Account for a projected ROE of 9.81%. I will discuss the WCMA and WCEMA more in a moment. The advice letter also proposes a 2-basis-point increase in the cost of debt to 5.28% and an overall rate of return of 7.86% effective January 1, 2024. On October 2, 2023, the CPUC authorized the reimplementation of the WCMA and WCEMA retroactive to April 20, 2023. As of April 11, 2023, SJW Water Company has no longer afforded the revenue protections of the WCMA and WCEMA, which were in place to offset both revenue and expenses impacts of lower water usage from the mandatory conservation measures.

With these retroactive implementations, San Jose Water will enjoy essentially uninterrupted benefits from these mechanisms. The approved continuation of the WCMA also involves the retroactive reimplementation of a temporary 20-basis-point reduction in the ROE when the WCMA is in effect. The estimated amount not yet recorded in after tax earnings is $2.7 million. As of September 30, 2023, we have and will continue to offset the lost revenues from conservation to this balance, which reflects the balance of the drought surcharges collected during the mandatory conservation period that ended April 11th until it is exhausted. Doing so provides immediate recovery of lost revenues resulting from conservation. As noted by Eric, earlier, the CPUC agreed with our position that temporary revenue protection mechanisms were warranted, because of the 15% voluntary water use reduction goal established by our water wholesaler based on continuing water shortage or water storage restrictions and precipitation variability.

The CPUC’s decision on the WCMA and WCEMA is a win for our customers, the company and the environment. It gives us the opportunity to maintain our meaningful water conservation programs while encouraging customers to make conservation a way of life, helping reduce and stabilize water bills and supporting sustainability, as well as water supply given the reduced local storage. Our regulatory affairs team worked with the CPUC to address the inherent challenges in predicting the supply mix at San Jose Water Company and forge an approach that protects customers and shareholders from the cycle of droughts in California. The CPUC’s authorization of the full cost balancing account is retroactive to January 1, 2022 because of the delayed general rate case.

Our customers continue to experience the benefit of the full cost balancing account for water supply mix. The plentiful precipitation during the rainy season that continued into the spring resulted in higher than normal availability of our own surface water supply. The increased production from our own supplies benefits customers, because it replaces the higher cost supplies from our wholesaler that is imputed in our water rates. The resulting reduction in overall water production costs from our increased own supply flows back to customers. The full cost balancing account tracks actual versus authorized water supply and purchase power costs and eliminates the supply mix volatility that has impacted past earnings. Customers benefit when there is greater surface water availability and the company is protected when there is less availability.

We saw the benefit for the full year 2022 when San Jose Water Company was able to book $2 million in revenue losses to this account. In 2023, the full cost balancing account balanced through third quarter of 2023 as a result of the greater surface water availability was an over collection of $9.9 million providing benefits to customers. In Connecticut on October 3, 2023, we filed a general rate case application with the Connecticut Public Utilities Regulatory Authority for a $21.4 million or 18.1% increase in annual revenues. Approximately two-thirds of the requested rate increase is related to infrastructure investment. The application is also a proposal for expanding our low income water rate assistance program for eligible customers. Connecticut Water has offered a 15% discount on water bills through the WRAP program since 2021 and was the first water utility in the state to offer this type of program.

Under statute, PURA has 270 days to issue a decision on our request. We expect any approved rate increase to be effective on or about July 1, 2024. On September 25, 2023, PURA approved our request for a 1.19% increase in the Water Infrastructure and Conservation Adjustment effective October 1, 2023. The increase will generate $1.3 million in annualized revenues. On August 25, the Maine Public Utilities Commission approved our request for temporary rates in the Biddeford-Saco division, which will generate $1.5 million on an annualized basis. The decision was related to our general rate case application filed last March requesting $2.9 million increase in annualized revenues to cover the operating expenses and increased borrowing costs from constructing the new Saco River Drinking Water Resource Center.

The facility went in service last summer. A final, fully litigated decision on the total $2.9 million requested increase is expected in the fourth quarter of 2023. Maine Water also filed an application with the MPUC to recover $1.7 million in completed infrastructure investments in the Camden Rockland division through the Water Infrastructure Charge or WISC. If approved, as requested, it would generate $158,000 annualized revenues. A decision is expected in the fourth quarter of 2023. On August 14, 2023, we closed on two significant acquisitions in Texas. KT Water Development was acquired by the Texas Water Company. It brings 570 new residential connections. The Public Utilities Commission of Texas final order that translates the Certificate of Convenience and Necessity to Texas Water is expected in the fourth quarter and we also expect approval at that time of our request for fair market value and applied rate doctrine treatment.

KT Water Resources was acquired by our Texas Water Resources subsidiary, a water supply company that is not regulated by the PUCT. KT Water Resources has approximately — has water resources that are expected to boost our available water supply by approximately 40% in our growing Texas service area. Engineering and design work is already underway on the necessary infrastructure investment needed to bring the critical new water supply source to our existing customers. We anticipate that customers will begin to see the full benefit of this new water supply within the next few years as the infrastructure is built out. Over the past year, we have seen increasing developer interest in our Texas service area as outstanding development units with the potential for new connections increased from 15,000 units at the end of 2022 to 22,000 units today.

That is not surprising as Texas Water currently serves three of the five fastest growing counties in the United States according to the U.S. Census Bureau. With more than 27,500 water connections and 900 wastewater connections in the area between Austin and San Antonio, the company has quadrupled its service connections since 2007 and we intend to continue this momentum through the prudent acquisitions, organic growth and securing water resources like KT Water to support that growth. We continue to advance our application for a system improvement charge in Texas. The SIC would allow Texas Water to add certain utility plant additions made since 2020 to its rate base, thereby increasing revenue and avoiding the immediate need for a general rate case.

The SIC is projected to increase Texas Water’s revenue by $1.6 million within one year of the PUCT’s approval. A decision is expected in Q1 2024. The U.S. Drought Monitor has classified our Texas service areas being in extreme to exceptional drought. We have systems in Stage 3 and some in Stage 4 drought conditions. We are targeting a voluntary 20% reduction in water use in the Stage 3 areas and a 25% reduction in target in the Stage 4 areas. Usage has been down year-to-date, but we did see a partial recovery in the third quarter. We are updating our 2023 guidance range to $2.65 per share to $2.70 per share of net income. Our guidance increase is attributable to our exceptional performance in 2023, driven by several factors, including, the successful implementation of initiatives to address anticipated challenges such as procurement to further leverage our combined spend and using equity to offset higher interest costs; recovering water usage in California and Texas, when our guidance was issued, California was still under emergency drought declaration; the partial release of an income tax reserve relating to repair tax deductions; a year-end study to optimize expansion of the use of repair tax; and the various constructive regulatory decisions that we have already discussed.

As investors consider the impact of this guidance change on the future, it’s important to note that we benefited in the current year from a change in regulation that allowed the company a one-time release of $0.08 related to income tax reserves. Also, we look to invest in the future growth and improved operations. We expect an impact of between $0.04 per diluted share to $0.08 per diluted share for 2024. While we have not come out with 2024 guidance yet, we want to make sure that our investors are aware of these factors so that they can take them into account as they think about their earnings expectations for the company in 2024 and beyond. Year-to-date, $77 million has been issued through ATM and additional $5.7 million is targeted for 2023, which includes a total of $32.5 million for acquisitions.

We maintain our five-year capital investment outlook of $1.6 billion, which includes approximately $230 million in estimated PFAS remediation projects based on the EPA’s proposed maximum contaminant levels. We also reaffirm our long-term growth rate of 5% to 7% anchored off of 2022 diluted earnings per share of $2.43. We anticipate EPS will be non-linear because of the rate case cycles. With that, I will turn the call back over to Eric.

Eric Thornburg: Thank you, Andrew. Well done. One of the ways we measure our growth and success as a company is being a force for good and delivering for customers, communities and the environment. As a water company, we are particularly focused on helping build a sustainable future for our communities, which is why we are working hard towards our goal of reducing greenhouse gas emissions by 50% by 2030 compared to 2019. By the end of 2023, we will have nearly 2,300 megawatt hours of installed solar capacity across our local operations and we estimate that by the end of 2024, our installed solar generating capacity will more than double to nearly 6,200 megawatt hours. That’s enough green energy to power nearly 600 homes in the U.S. for an entire year.

Further, it will lower our operating expense, which will help us to minimize future customer rate increases. We are also being intentional about purchasing energy from renewable sources and we are investing in infrastructure projects that will lower operating expenses. For example, in Connecticut, the interconnection of our largest water system with a smaller nearby system will produce significant savings annually and eliminate a dependency on a single source of supply. We also continue to leverage our increased purchasing scale since the CTWS acquisition through the procurement process. Through the third quarter, we estimate approximately $320,000 in O&M savings by focusing on enterprise-wide RFPs, multiyear agreements and harnessing the expertise of a cross-functional team of leaders to develop and select suppliers.

To be clear, our commitment to ESG runs deep and extends from the field to the Board and beyond our organization to vendors. We are proud that our successful environment, social and governance initiatives are being recognized, showing we are making a meaningful difference. Our rating from MSCI was recently boosted to A from BBB and our GRESB rates are public disclosure of ESG in the upper third of our peer group. Our Connecticut utility has been recognized as a top workforce for the third consecutive year based on the feedback of our employees in an anonymous independent survey. In California, we have been recognized by the National Association of Clean Water Agencies for watershed stewardship. In Maine, our utility was recently named the Utility of the Year by the New England Water Works Association for our innovative approaches to efficiently address challenges that benefit our customers.

We will continue to work towards achieving rankings that reflect our long-term commitment to our environment, customers, employees and communities. I am also pleased to welcome Denise Kruger to the SJW Group Board of Directors. Denise has more than 30 years of experience in the water service profession and is a recognized water industry leader. Her knowledge and experience in water supply, as well as environmental and economic regulation in California will serve us well. We also welcome Aundrea Williams as President of Texas Water. She comes to Texas Water from NextEra, where she held several roles, including President of NextEra Water, Texas. Her leadership qualities, her character and her extensive experience developing and executing regulatory and legislative strategies make her a fantastic addition to the team.

As I have shared before, our people are what makes the difference at SJW Group. I continue to be inspired by the contributions of our talented teams across our national footprint as they consistently provide an essential service with integrity, reliability and peace of mind for our customers. I am confident our team’s commitment to serving customers, communities the environment and shareholders will continue to propel SJW Group’s ability to deliver value to our stakeholders and reinforce our strong position for a successful future. With that, I will turn the call back over to the Operator.

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Q&A Session

Operator: Thank you. [Operator Instructions] The first question comes from Angie Storozynski with Seaport Research. Your line is open.

Angie Storozynski: Thank you, guys. Very strong results. Congratulations. I am clearly a bit surprised how strong the results were. So maybe just taking a step back, I understand the tax benefits and what should we think will be the effective tax rate next year? Are we still like around, say, 10%,12%?

Andrew Walters: Look, I think that, look, we are going to need to — we are finalizing where it is and it’s the problem with projecting effective tax rates, Angie, as you know, is it depends on like discrete tax items. We have a repair tax study that’s in process, that’s — we don’t know the final results are until this next quarter, the quarter that we are in now. So until that comes out, I am not really wanting to comment specifically, but I think the range that you are talking about is consistent with the range that we have demonstrated in the past.

Angie Storozynski: Okay.

Andrew Walters: If there’s time so we can fine-tune that and make that even better, we will do that.

Angie Storozynski: Okay. Then moving on to the WCMA and WCEMA. So I understand it’s retroactive to April, but is the assumption that it expires at the end of this year or does it stretch, I mean, am I going to get this support in 2024 as well?

Andrew Walters: Yeah. So our baseline assumption is that it will continue into next year. It will be as long as the voluntary call for conservation is in existence from Valley Water or Water Wholesaler. And as Eric highlighted in his comments, they have got specific areas that they are trying to guard against, which is higher usage when they have lower storage. So with that in mind, I think, the view will be that they will be in more of a conservation mode for some time to come.

Angie Storozynski: And then, again, on the same topic, so some of the strengths in the third quarter results had to do with recovering usage, recovering usage is probably mostly in Texas, but also in California. So I am just wondering if some of this benefit will be offset or absorbed by the fourth quarter booking of the WCMA.

Andrew Walters: So it’s definitely in the number that is already provided for what we would have booked reflects the current usage. So what that tells you is we are still for the — at least for the period of time ending in the third quarter, there was greater underutilization by customers up through the second quarter. But in the third quarter, we saw relatively less usage compared to those prior quarters, but it still is a benefit for us. So that’s going to be something that will continue for a period of time. There will likely be a benefit that will continue into the fourth quarter.

Eric Thornburg: We have not recovered…

Angie Storozynski: Okay.

Eric Thornburg: … to authorized revenue, just to be clear.

Angie Storozynski: Okay. And then, lastly, you mentioned the $0.04 to $0.06 of costs in 2024 associated with the growth of the business. But I am just wondering if there is any catch-up on the cost side from 2023. I mean, you clearly didn’t know if the WCMA is going to be reinstated, so I am sure that you were managing your O&M expenses around the guidance. So, again, is there any level of cost that is basically delayed?

Andrew Walters: No. That’s an excellent question and I think that’s something that people will look at, different ways that they can manage. We try to focus on not impacting our operations, particularly on the maintenance of our business. We look for other ways that we can save and particularly we focus on our methods, which we were very successful at doing. We looked at the way that we are operating the business and it just took time for that to catch up with us and it’s produced the results. That process that the team has been working on is years in the making and we are finally seeing the results with that continued focus on how they impact our maintenance and operations. That is something that we will continue into next year. So I don’t expect [Technical Difficulty]

Angie Storozynski: I am sorry. I hope that was not my echo. Okay. Great.

Andrew Walters: Okay.

Angie Storozynski: Thank you.

Andrew Walters: Okay. Thanks.

Eric Thornburg: Thank you, Angie. Thanks for your questions.

Operator: Please stand by for the next question. The next question comes from Richard Sunderland with JPMorgan. Your line is open.

Richard Sunderland: Hi. Good morning. Can you hear me?

Andrew Walters: We can. Thank you.

Richard Sunderland: Great. Thanks for the time today. Picking up on the last question and maybe I missed it with the echo there, so apologies if I am retreading ground, but the $0.08 and the $0.04 to $0.06 identified in the script, is that drawing a line to kind of those items versus the $0.20 to $0.25 guidance increase? The delta is recurring in 2024 kind of putting aside the question of usage, which I recognize complicates things or is that overly simplistic in terms of what you have that’s structural and recurring into next year?

Andrew Walters: Right. That’s an excellent question and that’s what it’s meant to do is to try to give a little bit of guide rails as people think about it. We are not through our budgeting process, but we know that there are some things that we want to do that is not like maintenance-related, but are things that we can invest in our business to make it stronger in the future. There’s going to be a little bit of that investment that we will take this opportunity in 2024 to execute on some of those items. Now, if you think, though, about it, the $0.08, if you just go from high point to high point of $2.50 to $2.70 [ph], that $0.08 comes off for next year because it is definitely not a recurring item. That was something that was due to the IRS regulation change and allowed us to take that benefit into this year.

Richard Sunderland: Understood. Understood. I guess changing topics to Texas, the drought conditions sound like real local challenges. Can you speak to, I guess, a little bit of the push and pull here between the strong growth in the state relative to the drought and usage impacts and how to think about overall risk or opportunity here in 2024? Should, I guess, A, the conditions stay as is, or B, there’s an improvement in the drought?

Andrew Walters: It’s a great question. Look, I think, the good news is that, this is definitely a weather-driven aspect and what we are seeing is we have seen some early rains impact the area. It’s not the kind of rains that will change our water supply, but this is a little bit on the earlier side to see some of those rains. It could be a view towards where the El Nino will drive a higher usage or precipitation in Texas in that old belt that has been quite impacted by the drought. So I think that those are the possibilities. Now, I am not going to talk about 2024 per se, but I will talk about the future. That addition of KT Water and the 40% increase in the water supply that that brings to the system, that is something that the team is working very hard to get implemented and as we get that implemented into our system, that will further diversify the water sources that we have, able to support not only the growth, but also times of drought and so it’s a very significant addition that will have a meaningful impact on our resiliency into the future.

Richard Sunderland: Got it. Very helpful. You got to where my follow-up was going to be. So maybe I will just ask one other question on the Connecticut side. I think in terms of the filing, you framed it as two-thirds related to capital. Just thinking about that overall, is that inclusive of WICA roll-ins in terms of the two-thirds and the overall increase? How does that look excluding the WICA side, just in terms of a new ask on rate payers here?

Andrew Walters: Yeah. So that’s a good question. I am going to follow-up with you on the specific that comes off of the WICA. But if you think about the WICA just off the top of my head, there’s a 7% that’s filed in place of revenue of the 10% revenue. There is definitely a portion that those will get rolled in. But as we looked at our overall numbers for Connecticut, the amount of investment has driven the rate increase and that’s really what the story is, is that, as opposed to having an expense increase driven, this is about capital investment, which is the most sustainable approach towards rate increases for our customers.

Eric Thornburg: Yeah. Just what I would add, Richard, is that, none of the amount filed includes any WICA, because that’s our — that’s a separate proceeding and it will get rolled in, but it doesn’t reduce the amount requested. And I would just further comment that we are actually optimistic regarding this filing in Connecticut. We have carefully reviewed the Aquarian and Avangrid decisions, and I think, we have very effectively applied the lessons learned and some of the new expectations that PURA articulated in those final orders. So our delay in our case filing was effective, I believe, in addressing those concerns and we expect to be treated fairly in this process and we will keep investors posted as we proceed throughout the year.

Richard Sunderland: Understood. Thank you for the time today.

Eric Thornburg: Yeah. Thank you.

Andrew Walters: Thank you.

Operator: Please stand by for the next question. The next question comes from Jonathan Reeder with Wells Fargo Securities. Your line is open.

Jonathan Reeder: Hey, Eric and Andrew. How are you all today?

Eric Thornburg: Hey. Hi, Jonathan. Thanks for calling in today. Appreciate it.

Jonathan Reeder: Yeah. Thanks for having me. So, a lot of my questions have been asked, but, Andrew, I did want to get just a little clarity. When you were talking about the revised 2023 guidance, what was the $0.04 to $0.06 dilutive impact related to?

Andrew Walters: Yeah. The $0.04 to $0.06 is for 2024, so do not think about that as this year item. But as we look at our business and the opportunity that we can use to invest in it and create future growth well into the future, we are going to take some of that opportunity in 2024. So that’s what it is. It’s really meant to kind of keep people in mind that there is, it’s not just like you start adding the numbers on. You need to account for the fact that we do have some plans as a management team to continue to make that growth be sustainable well into the future. The $0.08 that you do need to account for this year is just really the non-repeating item related to the tax change and so that, again, those were all meant for people as they think about 2024 and beyond. It was not to do with this year.

Jonathan Reeder: Okay. That makes sense. Great. And then what was the benefit from the year-end repair tax study? I mean, is that something that carries forward?

Andrew Walters: That’s something that will come in. It’s something we don’t — we actually, when we are giving you the guidance, we don’t have the answer to that as we are giving guidance. So that’s the — hence the range and why we are highlighting that is one of the items that we have to pay attention to for the outcome of which, which could drive results higher or lower than what we are projecting.

Jonathan Reeder: Okay. But that’s something that based on that study that it’s — it will continue in the future.

Andrew Walters: Right. Typically, when you do those studies, you have kind of a one-time catch-up for stuff that you — that’s been in the system. But it will continue to have an impact on those new additions that qualify under that study.

Jonathan Reeder: Okay. Okay.

Andrew Walters: Once it comes out, we will definitely talk about that in the fourth quarter, obviously.

Jonathan Reeder: Okay. So, I mean, right. It’s tough at this point to say, I guess, what we should be looking at is, like, normalized 2023 kind of EPS power. I mean, it sounds like it’s above the $2.40 to $2.50 [ph] to some degree.

Andrew Walters: That’s correct. It’s definitely an expansion of where we are today from our previous forecast into 2024.

Jonathan Reeder: Yeah. I mean, I guess…

Andrew Walters: But I want to give — go ahead.

Jonathan Reeder: Yeah. I mean, I guess, when you are going into the year, the two things that maybe you are really unsure of, I mean, well, you weren’t expecting the WCMA, I don’t think, to get extended. I mean, that wasn’t in the base forecast and then I think the outcome and the cost of capital end up being a little better than initially expected. Are those two things fair?

Andrew Walters: Those are fair, along with the other things that I went through.

Jonathan Reeder: Yeah.

Andrew Walters: The usage recovery and to some extent, and then, obviously, the performance of our team. They did a really good job of where we expected this to be a more challenging year than what has come before us. The team really did a good job and there’s a lot of stuff that’s below the radar that we wouldn’t talk about because it’s lower materiality. But it’s a lot of singles and doubles that added up to a good outcome.

Jonathan Reeder: Okay. Good. No. Yeah. Congrats on a good quarter and thanks for taking my questions today. Good luck with Kinetic issuance.

Andrew Walters: Thanks, Jonathan.

Jonathan Reeder: Yeah.

Andrew Walters: Yeah. Thank you. Appreciate it.

Operator: Please stand by for the next question. The next question comes from Gregg Orrill with UBS. Your line is open.

Gregg Orrill: Hi, there.

Eric Thornburg: Hi, Gregg.

Gregg Orrill: Maybe an obvious clarification, but the $2.7 million after tax remaining for the WCMA, WCEMA, that comes in in the fourth quarter?

Andrew Walters: That will come in in the fourth quarter. It’s not reflected in the third quarter earnings because the approval did not come in until after that timeframe.

Gregg Orrill: Okay. All right. Thank you.

Andrew Walters: So and that’s — but that’s reflected, obviously, in that guidance that we have provided.

Gregg Orrill: Yeah. Got it.

Eric Thornburg: Thank you, Gregg.

Operator: [Operator Instructions] Please stand by for the next question. The next question comes from Angie Storozynski with Seaport Research Partners. Your line is open.

Angie Storozynski: Thank you. Just a couple of things. I know you are not providing a 2024 guidance, but I will still ask. So here’s my question. So on the one hand you have the support from the high ROE in California, that there’s some tax rate changes, cost changes, et cetera. But also you have delayed the Connecticut rate case, right? So I am just — I know that’s probably a very small earnings driver, but I am clearly fishing for like a directional guidance on 2024. I mean, we are basically staying largely flat, hence you emphasize the non-linear nature of your growth rate and especially with that benefit — with those benefits that we discussed the 2023, that makes, basically, it’s very hard to actually solve for growth and earnings year-over-year between 203 and 2024, at least that would be my take as of now?

Andrew Walters: Yeah. Look, Angie, I definitely think that there should be some factors that increase our 2024 based off of our performance and where we expect things to go. What I do want to caution against is getting too aggressive with those increases. I don’t want to disappoint folks once we get done with our budgeting process. So I am trying to be as transparent as possible about the things that we see today, that we will do some additional investment and there’s some one-time items that you have to take back out in order to get there. But even once you do that, there should be some upside versus where most of us were looking at our 2024.

Angie Storozynski: Okay. And then changing topics, so you mentioned PFAS CapEx. So can you give us a sense of the recovery? You mentioned the potential settlement with polluters. I mean, I am just trying to understand how this spending flows through your rate base and what’s the recovery mechanism?

Andrew Walters: So for us, I think, the key is, we don’t anticipate a significant cost offset due to the settlement. There will be some, right? But that is to be determined. There’s a lot of people that are participating. You have got to put the claims in and that process is going to take a significant period of time, which we don’t have time for. Whenever there is something like this for us to address on behalf of our customers, we are going to be very aggressive at working towards addressing the issues. And so given that, we will use and focus on the traditional recovery mechanisms that are at our disposal, which our various regulatory agencies have been very supportive of trying to take care of the health and safety of our customers.

Angie Storozynski: Okay. Okay. Understand. Thank you.

Andrew Walters: Thank you.

Operator: Please stand by for our next question. The next question comes from Jonathan Reeder with Wells Fargo Securities. Your line is open.

Jonathan Reeder: Hey. Sorry. Just had a one follow-up, if you don’t mind. So I know previously you stated that you weren’t optimistic that the CPUC or at least the staff, would be supportive of bringing back decoupling in California. Does the approval of the WCMA, does that change that perspective at all, that they are taking kind of a bigger picture, longer term kind of conservation effort and putting kind of those kind of tools in place, including potentially decoupling, would be beneficial?

Andrew Walters: No. I think what they are highlighting is they are focused on the specific issues that we are dealing with in our service area of having a voluntary drought declaration and they recognize that it sends mixed messages to your customers and that it creates undue stress on a company like us to try to recover when you have got the major wholesaler promoting conservation and trying to get people to use less water. So given that, I think, they have highlighted the need to make sure that everybody is driven towards the same results and that would be my view. I don’t want to…

Eric Thornburg: Yeah. I’d just add, Jonathan, that Valley Water has Anderson Reservoir undergoing a seismic refit and because of the lower pool that has to be maintained during that construction period, that’s a bit of a unique circumstance, but it’s expected to be out of service or reduced service for nearly a decade while that work is undergone. So I think for the foreseeable future, SJWC will benefit from this based upon those circumstances.

Jonathan Reeder: Okay. And you said that’s supposed to be a 10-year kind of project, so?

Eric Thornburg: That’s correct. Yeah. Anderson Reservoir.

Jonathan Reeder: Okay. Awesome. Thanks for the additional comments. Appreciate it.

Eric Thornburg: Absolutely. Thank you, Jonathan, for the clarifying question.

Operator: I show no further questions at this time. I would now like to turn the call back to Eric Thornburg for closing remarks.

Eric Thornburg: Thank you, Operator. On behalf of all my colleagues on the Board, we thank investors for their continuing support of and interest in SJW Group, an organization with over a century and a half of service to communities across the U.S. and we are just getting started. Thank you very much.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.