California Water Service Group Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 26, 2023

Key Takeaways

  • Due to the delayed approval of the California general rate case, Q3 2023 operating revenue was reduced by an estimated $14 million–$27 million (year-to-date impact of $60 million–$93 million), with recovery deferred until CPUC decisions.
  • Third-quarter net income fell to $34.4 million and diluted EPS to $0.60 from $55.9 million and $1.03 in Q3 2022, reflecting the temporary absence of rate relief and concluded regulatory mechanisms.
  • Effective January 1, 2024, Cal Water’s return on equity will rise to 10.27% via the water cost of capital mechanism, expected to boost 2024 operating revenue by approximately $10 million.
  • Infrastructure investment remains strong, with Q3 capital expenditures of $96.9 million (up 25% year-over-year) and year-to-date spending of $274.1 million (up 23.4%), on track for a record annual total.
  • Cal Water has identified approximately $200 million of incremental capital needs to address PFOS treatment requirements, costs being tracked in a dedicated memorandum account pending regulatory recovery.
AI Generated. May Contain Errors.
Earnings Conference Call
California Water Service Group Q3 2023
00:00 / 00:00

There are 7 speakers on the call.

Operator

Good morning. My name is Christa, 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.

Operator

Thank you. I will now turn the conference over to David Healy, Vice President, Chief Financial Officer and Treasurer. You may begin your conference.

Speaker 1

Thank you, Christa. Welcome everyone to the 2023 3rd quarter results call for California Water Service Group. With me today is Marty Propelnicki, our Chairman and CEO and Greg Milliman, our 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.

Speaker 1

As a reminder, before we begin, the company has a slide deck to accompany the earnings call this quarter. The slide deck was furnished with the Form 8 ks this morning and is also available at the company's website at www.calwatergroup.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.

Speaker 1

Because of this, the company strongly advises current shareholders as well as interested parties to carefully read and understand the company's 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 4, which states our values and priorities. Moving on to Slide 5, 3rd quarter financial highlights. As discussed last quarter, 3rd quarter and year to date results primarily reflect the adverse impact of the delayed proposed decision from the California Public Utilities Commission or CPUC on Cal Water's 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.

Speaker 1

There is one change from our last quarter's discussion. The delay of the general rate case is now expected to move CPUC approval of the advice letter for the 2023 Drought Funds Memorandum Account or DRIMA operating revenue into calendar year 2024. We estimate the adverse impact of the delayed general rate case on 3rd quarter 2023 operating revenue to be in the range from $14,000,000 to 27,000,000 Of which $5,000,000 to $5,500,000 is related to DreamHub. 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, Q3 2023 operating revenue decrease $11,300,000 to $255,000,000 as compared to the same period last year.

Speaker 1

The decrease was primarily from the $29,600,000 decrease in RAN and MCBA revenue as those mechanisms concluded on December 31, 2022. The decrease was partially offset by $13,700,000 of 2023 general rate increases and a $1,800,000 reduction in revenue deferral. 3rd quarter 2023 operating expenses increased $10,100,000 to $211,500,000 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 costs and depreciation and amortization expense. Moving on to Page 6.

Speaker 1

During the Q3 of 2023, net income attributable to group was $34,400,000 and diluted earnings per share was $0.60 as compared to net income attributable to group of $55,900,000 and diluted earnings per share of $1.03 quarter ended September 30, 2022. As discussed, the delayed California general rate case proposed decision had an adverse impact on net income attributable to group. As noted at the bottom of the slide, I'm pleased to report group's capital investments during the Q3 of 2023 was $96,900,000 which was a 25% increase from the same period last year. And now, I'll turn it over to Greg Milliman to cover Slide 7.

Speaker 2

Thank you, Dave. On Slide 7, you can see as we've discussed in prior quarters, we have 3 unrecorded California regulatory mechanisms that we are tracking. Our practice is not to record revenue until the 2021 GRC amounts are known and approved by the commission. All of these mechanisms as dates And our go back effective to January 1, 2023, we have the largest the interim rates memo account tracks the difference between interim rates and our final rates. We have the Monterey style revenue adjustment mechanism the track difference between actual residential sales revenue and residential sales revenue at a single quantity rate.

Speaker 2

And then we have the drought response memo account that tracks difference in sales revenue Sorry, tracks the difference in reduced sales revenue from conservation during a drought. This will stay open until California Governor Gavin Newsom declares the drought over which could happen in sometime in 2023, 2024 Or depending on what happens with the weather in our state, it could stay open longer. Recovery from that will be by a separate filing and Those revenues will not be recorded in 2023. They'll be recorded once the commission approves that filing. Turning to Slide 8.

Speaker 2

This is just gives you the financial impacts of the 3 recorded regulatory mechanisms For the Q3. Again, as Dave said, based on the current position of the parties in the 2021 GRC filing, we estimate the statement of operating revenues during the Q3 to be in the range of $14,000,000 to $27,000,000 or $0.22 to 0.41 Earnings Per Share. Something of note would be the in the right before the subtotal where it says MRAM, you'll 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 fourth tiers and the single quantity rate is more in line with the second tier.

Speaker 2

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 the slide that will show the same table with year to date results. And you'll see with almost 3 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, Dave.

Speaker 1

Thank you, Greg. Moving to Slide 9, additional Q3 2023 highlights. As noted on the slide, 2024 operating revenue is expected to increase approximately $10,000,000 From an increase in Cal Water's return on equity to 10.27 percent effective January 1, 2024, the increase was from the water cost 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. 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 program to pay monthly water bills.

Speaker 1

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 3rd quarter earnings per share to 2023 3rd 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 1st 9 months of 2023 operating revenue to be in the range from approximately $60,000,000 to $93,000,000 of which $16,000,000 to $18,000,000 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 mechanisms.

Speaker 1

As discussed earlier, we expect CPUC approval of the advice letter quarter 2020 3 Dream Operating Revenue in 2024. As noted on the slide, operating revenue for the 9 month period ended September 30, 2023 decreased $65,400,000 to $580,100,000 as compared to the same period last year. The decrease was primarily from a 48 $8,000,000 decrease in RAM and MCBA revenue as those revenue mechanisms concluded on December 31, 2022, a $20,000,000 increase in revenue deferral And a $25,300,000 decrease in build metered revenue. These decreases were partially offset by general rate increases, a change in balancing accounts and interest on the net grant MCBA balances. 3rd quarter operating expenses decreased $5,900,000 to $538,200,000 as compared to the same period last year.

Speaker 1

Overall, quarter. 3rd quarter 2023 operating expenses were in line with expectations. The decrease was mostly due to $16,400,000 decrease in costs associated with revenue deferral and a $3,000,000 decrease in water production cost, which was partially Offset by increases of $7,700,000,000 employee labor costs and $3,200,000 of amortization expense and $1,900,000 of property and other taxes. Moving on to Slide 12, financial results year to date 2023. For the 9 month period ended September 30, 2023, net income attributable to group was 21,700,000 or $0.38 earnings per diluted common share compared to net income attributable to group of $76,400,000 or $1.41 earnings per diluted common share for the 9 month period ended September 30, 2022.

Speaker 1

As discussed, our year to date results reflect the temporary absence of 2023 California general rate case, rate relief and revenue adjustments from regulatory mechanisms. As noted at the bottom of Slide 12, group invested $274,100,000 and Infrastructure Investments during the 9 month period ended September 30, 2023, Which was a 23.4% increase from the same period last year. Moving to Slide 13, which is the year to date unrecorded California regulatory mechanism details. It breaks out the revenue by the different regulatory mechanisms. And Greg pretty much covered the details of these.

Speaker 1

So I'm 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. And now I'll turn it over to Marty to cover Slide 15.

Speaker 3

Thanks, Dave. Good morning, everyone. As we kind of go through the fog of the delayed rate case and certainly Having $60,000,000 to $90,000,000 of revenue we can't record or $0.93 to $0.93 to $1.45 a share that we can't recognize. We're waiting for The rate case to be approved makes things complicated. There are certainly some additional highlights I'd like to talk about for the quarter.

Speaker 3

1st, as Dave just mentioned, our capital investment program year to date, we're at a new high. We are on track going into the 4th 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 for which we grow future earnings. That continues to be strong. We've had a 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.

Speaker 3

But overall, we have about another 4 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 of 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 dealt with wildfires that have been in excess of 100,000 Acres Burn. 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 3 fires that were started and it was really the kind of the perfect storm between a drought that they were having in the Hawaiian Islands, climate change, it's just 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.

Speaker 3

In the upcountry, you had the Kalua and the Alinda fire, and those were close to our Pukulani system. In Central Maui, you had the Payahue and the Kihei Fires. They burned about 3,200 Acres. And on the west side, you had the Lahaina fire, which was about 2,100, 2,200 Acres. And while None of our systems were directly affected.

Speaker 3

We do own the Kaanapali, the Kapolei and the Pukulani systems. Things are very, very chaotic and I'm very happy to report that our employees follow their training. 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.

Speaker 3

And we did our job in terms of helping our customers protect their property By keeping their systems wet and the fire flows going for the fire department says they battle these fires. Likewise, we were the only potable water provider on the west side of Maui for a number of

Speaker 4

days after the fire.

Speaker 3

So I just want to Give 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 in Maui liquidity in the company remains strong. We maintained $69,000,000 of cash, of which $34,000,000 is restricted. We have short term borrowing capabilities of $485,000,000 That's significant while we're waiting for the general rate case decision. There's no crunch on liquidity at the company.

Speaker 3

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 At the market, our ATM program that we currently have in place, and we don't anticipate really selling shares probably for the rest of the year, 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 $32,800,000 from the collection of the RAM and MTBA 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 our cash position year to date and during the Q3.

Speaker 3

The other noteworthy item in the quarter is when you look at the Q3 of 2022, we had a $9,300,000 unrealized loss on non qualified benefit plan investments. And then this year for the same period that was a positive 7 quarter and added $700,000 in the other income expense. Going on to Slide 16. As Dave mentioned earlier, the cost of capital adjustment mechanism performed as it's designed. The mark period is from tenone, so October 1 to September 30 in a given year and it tracks the Moody's Utility Bond Index and the changes in that bond index.

Speaker 3

And when that bond index changes more than 100 We're allowed to file for an adjustment to our ROE, 50% of the change. So essentially the change from September excuse me, from October 1, 2022 to September 30, 2023 was 140 basis points. 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 7.4 6th, our overall rate of return, ARR as the variable is in rate making. That's a Tier 2 advice letter that's filed on October 13. We expect to get that approved here 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 effective for October 1.

Speaker 3

As Dave mentioned, this will add approximately $10,000,000 to our income going into 20 24. Speaking of regulatory updates, I'm going to hand over to Greg Noemann to give you an update on the California general rate case. Greg?

Speaker 2

Okay. Just for clarification, the cost of capital adjustment that Marty mentioned, You said effective October 1st, it will actually be effective January 1st. I think, Johan intensely mentioned that Appreciate that. Moving right along with the California general rate case, the main point here is, As you know from the Q2 that a second judge was added to our case and we have we've been getting information requests from the judges that are clearly demonstrating that they're working on the case and proceeding forward with hopefully the deadline that's currently set out to completed by December 31, 2023. Moving to Slide 18, These are the other regulatory matters that we are proceeding with.

Speaker 2

As you can see, we have a application in to increase our ability to raise capital by $1,300,000,000 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 filed and completed a rate case in Washington to increase our company revenues by $2,100,000 that became effective, I believe it was July 28, 2023. Moving to Slide 19, I'll just ask you Marty.

Speaker 3

Yes. Thanks, Greg. In terms of PFOS 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 clearly has been a lot of activity.

Speaker 3

For us, there's really no change in our PFOS kind of program. We have a memo account on file with the commission that allows us to track our incremental costs associated with PFOS testing. And then we've 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, 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 $200,000,000 that we estimate as being our capital needs to treat PFOS and the systems that we operate is incremental to the capital program that we talk about.

Speaker 3

So the slides that we put in this deck is part of the rate case capital that we plan for and do in the ordinary course of business. Something like this when 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.

Speaker 2

If you

Speaker 3

go to Slide 20, you'll see where we are kind of year to date that $274,000,000 Again, that's a new 9 month high for the company. And we are on track going into the 4th quarter for a record capital investment year. Again, overall, we don't see The capital needs slowing down anytime soon. Anything that's used for PFO or PFOS treatment will be incremental to the numbers that you see on the slide. Likewise, this slide will get trued up when we get the final decision from the CPUC.

Speaker 3

Please. The slide is based on what we've asked for in the rate case and also what we have actually spent the last couple of years while going through the rate case process. Looking at Slide 21, that investment flows through to our rate base. This is what our forecasted rate base looks like based on the current assumptions and again this will get trued 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?

Speaker 3

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 1st and Greg, thank you for that correction to 10.27. We haven't had an ROE Above 10.2% in at least the last couple of decades. CapEx continues to remain strong and there's Infinite places to put capital. So on the capital side of the business, things are going well.

Speaker 3

Obviously, as I mentioned earlier, the fog of a 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 the rate case is being worked on. But I also know it's very frustrating while we have to wait for administrative delays and it causes a lot of confusion in financial reporting. The current deadline for the commission that they have on file to conclude our 20 In addition to that, 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. And it's thousands and thousands and thousands of pages Documentation and testimony that gets filed.

Speaker 3

So the team has been busy working on that. And obviously, we are pushing forward with our PFOA, PFOS programs to treat the wells that we have in our service territory that may show trace elements of those chemicals. So, Christa, with that, we will open up for questions, please.

Operator

Certainly. Your first question comes from the line of Davis Sutherland from Baird. Please go ahead.

Speaker 5

Hey, guys. Good morning and thank you for taking my time.

Speaker 3

Good morning, Davis.

Speaker 5

Just going through the slide deck, I noticed there was no update on the business development pipeline. I just wanted to ask if there should be simply there being no update to share or maybe a difference in how you guys are looking at fiscal 2020 4 or any thoughts there?

Speaker 3

No, actually, good question, Davis. No, no change in how we look at activity that we had in the Q3 was that we closed on the Stroh 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 rate case being laid, we just didn't think there were a lot of substantial changes in the last 90 days that we and there were no new announcements really in the last Monday, the Metro system closing. 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 rate case both on the revenue and EPS line.

Speaker 5

Got it. And those are very helpful. Thank you very much. And then my only other question is just on the CPUC filing for the $1,300,000,000 in equity and debt. Any estimates on when this decision might come back or if it would just be a continued smooth cadence of deployment or maybe any changes due to the rising rates environment or Yes, any other thoughts there would be helpful.

Speaker 5

Thanks guys.

Speaker 3

Greg, you want to take that one?

Speaker 2

I heard part of it and that's the timing. Application like that generally takes somewhere between 6 to 12 months to process. It's generally very non controversial, But the commission does have a process that they need to go through.

Speaker 3

Yes. 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 mechanism is Very unique to California. I'm not aware of other states that have a cost to capital adjustment mechanism.

Speaker 3

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 filed 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 is authorizing us to sell more debt and equity for our needs in terms of financing our capital program and running the company.

Speaker 3

So it's an administrative step with the commission, they approve it and then we have to have Shelf on file with the SEC. It's not an indicator we're going to go out and do a great big stock deal tomorrow or all of a sudden sell a bunch of new debt. It's basically used 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 to capital adjustment mechanism is working the way it's designed to work. And I think that's 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.

Speaker 5

That's very helpful. Thanks for the time guys. Appreciate

Speaker 3

it. Thanks, Davis. Have a good day.

Operator

Your next question comes from the line of Jonathan Reeder from Wells Fargo. Please go ahead.

Speaker 4

Hey, good morning, Marty and team. How are you guys?

Speaker 3

Good morning, Jonathan. How are you?

Speaker 4

Not too bad. Just Getting into the swing of earnings now. So I know you made the filing to increase the ROE under the water cost of capital mechanism. Have any interveners opined on that increase or by what date must interveners weigh in if they want to? Jonathan,

Speaker 2

yes. Jonathan, no one has intervened at this point in time. We filed it October 13 And the interveners have 20 days. So that would be November 7, I believe, I did the math right. But it's 20 days from October 13.

Speaker 2

I did the math wrong. I think it'd be more like November 3rd 4th.

Speaker 4

Got you. Okay.

Speaker 3

And, Greg, that's a Tier 2 advice letter, correct?

Speaker 2

Yes. It's a Tier 2 advice letter, which where water division approves it. They make sure that we follow the rules of the water cost of capital adjustment 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.

Speaker 4

Got you. Okay. Can you talk about maybe the strategy for the next cost of capital application? I believe it'd be due to be filed next year. In theory, is there interest in trying to extend the current parameters given the 2022 to 20 24 application just recently got a final order.

Speaker 2

We are currently discussing that with the other 3 water companies that are also supposed to file May 1, 2024. And at this point, we haven't settled on a strategy.

Speaker 4

Okay. All right. I think that's it for my questions At this point, as we continue to await the PD, so that at least sounds good if the ALJs are coming back to you guys for informational requests and it's consistent with them, certainly working on the case, but hopefully buttoning it up. So good luck with that.

Speaker 2

Thank you. Thank you.

Speaker 3

Great. Thanks, Jonathan.

Operator

Your next question comes from the line of Angie Storozynski Gee from Seaport. Please go ahead.

Speaker 6

Thank you. So just going back to that slide, which basically attempts to bridge the year to date results with what they would have been have the commission actually made a decision, so Slide 13. So can I ask this big range for this first line for Irma, right, 1.1 to versus 0.5, I mean, well, say a big range? So what is it? Is it why is there a range here?

Speaker 6

I mean, if you could just explain it to me from I'm like, I mean, there is a partial settlement in the case. So just again, so that I understand why the range is here.

Speaker 2

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, O and M expense items that we had in the case. And so 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.

Speaker 2

So that's the 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. First, basically no revenue requirement items settled.

Speaker 6

Okay. And then the Dream outline, right? So you're mentioning that that's going to be decided in 2024, right? So, I guess it all depends when in 2024, but is it fair to assume that we should just move that decision or that earnings stream from 2023 earnings to 2024. What if the decision is, for instance, made in, I don't know, January or February?

Speaker 6

Would that still be allocated to 23?

Speaker 2

I think Dave you would need to answer that one.

Speaker 1

Yes. So the way that the advice letter filing process works is we're going to get if we get a proposed decision, it's going to be finalized At the end of the year and then we would have to prepare the advice letter filing in the Q1 of 2024. And it's a Tier 3 filing, which would take several months

Speaker 6

to

Speaker 1

get approval. So it's going to be Toward the end of the second half of twenty twenty four. So there's it will not be reported in 2023.

Speaker 6

Okay. And then, sorry that I'm jumping like that, but the filing with the permission to issue a mixture Equity and Bonds. Is it fair to assume that I should assume that basically equity component is equivalent to the allowed equity ratio. I mean, so basically roughly 53% of that would be equity?

Speaker 1

Yes, that's a good assumption.

Speaker 6

Okay. And then lastly, what's again, I should be able 3rd, what's the drag year to date drag associated or if at all associated with the performance of your non qualified pension fund. Maybe not the year over year maybe what's the absolute number?

Speaker 1

I think we have the details in Slide 15, are you referring to opening that. You see that where we have the unrealized loss in 2022 Versus the unrealized gain in 2023.

Speaker 6

Okay. I see it. Okay. So those are not year over year numbers. Those are actually actual numbers.

Speaker 6

Okay.

Speaker 2

That's very good.

Speaker 6

Good. And then maybe one more. So again, I know that we're still waiting for the TRC decision, but you now have presumably visibility into the high ROE. We 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 transitory issue.

Speaker 6

So should we expect that the dividend increases will go back To the historical cadence or I mean are we in a simply a different interest rate environment and that somehow will suppress the dividend growth going forward?

Speaker 3

Our overall strategy, Andrew, is to have And keep our payout ratio between 50% to 60%, 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 when When you pay a dividend, it takes away from your ability to help pay for that program. Nonetheless, I think we recognize that we are a total return type stock and the company has had a long history of increasing its dividend every single year. So I would look at 2 things.

Speaker 3

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 and we're giving you kind of the goalpost of where we think the decision is 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.

Speaker 3

And I do not expect the company to deviate from its policy of increasing the dividend every year. I think that will likely continue. No, the question is how much? And obviously, we are in a rising interest rate environment. Your risk free rate of return is now at 4% or above depending on what duration bonds you're looking at and what type of bonds you're looking at.

Speaker 3

I'm also acutely aware that that compound annual growth rate or 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 was the rate case converted? And I don't think we're prepared to say more than that right now. But History will repeat itself, I think, with Cal Water.

Speaker 3

It's just a question of what size increase will it be.

Speaker 6

Okay. And I know that I promised that was the question, but now just one more. So you guys did numerous well, numerous, a couple of acquisitions. That's so the question I basically have, is that strategy going to continue in this higher financing environment. Is there more of refocusing on organic growth?

Speaker 6

Again, that's a question I think we hear from investors across the utility space. Again, as you said, PFAS potentially give you this incremental organic growth. But again, like strategically speaking, is there a shift towards organic growth and away from M and A?

Speaker 3

Yes. I think I'll kind of pull on our annual report that we have for this year, steady to helm, right? I mean, certainly, it's been a turbulent market, I think, the last 18 months to 2 years. Your interest rates, 2 years ago, we could borrow money at sub 1 half of 1 percent and now our borrowing rates, Dave, were what, at 6.5% On the line, we're A plus stable issuer. So it means the cost of capital is going up.

Speaker 3

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 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, improved service and hopefully bring new capital into a system that may be underinvested. So I remain optimistic on the M and A side. I think it might slow down a little bit.

Speaker 3

And to the question, Davis asked earlier, We didn't include that slide this quarter because we just had the one system closed, the Stroke 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 last 90 days. And we have a very good business development team.

Speaker 3

Some of you may have seen me promoted Shailan Patel into that role as leading that as our Chief Development Officer. And that's his full time job. And I think we will continue to look for strategic deals that will be accretive. And 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 continue to look.

Operator

And we have no further questions in the queue at this time. I will now turn the call over to Marty Kropolnicki, Chairman and CEO for closing remarks.

Speaker 3

Great, Christa. Thanks everyone 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. That's it for now. We'll look forward to reporting our year end results the end of February. Until then, please be safe and we'll look forward to talking to you really soon.

Speaker 3

Thank you.

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