California Water Service Group

NYSE:CWT

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the California Water Service Group First Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. David Healey, Vice President, Controller. Thank you. Please go ahead, sir.

[David Healey, Vice President, Controller]

Thank you, Jeff. Welcome everyone to the 2022 first quarter earnings results call for California Water Service Group. With me today is Marty Kropelnicki, our President and CEO; Tom Smegal, our Vice President, Chief Financial Officer; and Shannon Dean, our Vice President of Customer Service and Chief Citizenship Officer.

Replay dial-in information for this call can be found in our first quarter earnings release, which was issued earlier today. The replay will be available until June 26, 2022. 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 an 8-K this morning and is also available at the company’s website at www.calwatergroup.com.

Before looking at this quarter’s results, we would 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’re subject to various risks and uncertainties, and actual results could differ materially from the company’s current expectations. Because of this, the company strongly advises all 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 am going to pass it over to Tom to begin.

[Tom Smegal, Vice President and Chief Financial Officer]

Thank you, Dave. Good morning, everybody, from San Jose where we’re having a nice spring day in California, and we’ll talk about a number of things that are going on this year for us nationally and in California and some of the things that might affect us over the course of the year.

The quarter itself, I will talk about first and I am going to jump to Slide 5 to just do the comparative financials for the quarter versus last year, and it was a good quarter for us. We had higher revenue, of course, higher expenses related in some cases to that revenue. And the net effect of all of that was our net income was up $4.1 million to an income of $1.1 million as compared to a loss of $3 million in the first quarter of 2021 and our earnings per share was $0.02 for the quarter as compared to a $0.06 loss in the first quarter of 2021. And as everyone on the call, I am sure knows, this is our lightest quarter. We are mostly in the business of selling water and a lot of that water comes in the summer in California and Washington and Hawaii and so most of our revenue and profits tend to be in the second and third quarter of the year. And so a relatively quiet first quarter for us. Our CapEx improved over last year, very slightly, $1.7 million increase there, about 2.5%.

Flipping to Slide 6, a couple of the other highlights for us as far as business operations go for the quarter. We were really excited to be able to apply to our customer bills, the amounts that the state of California, have provided to us for customers who had become delinquent during the COVID pandemic. And so we have received about a little bit over $20 million in relief from the state, and we’ve now applied that to our customer bills. So we’ve seen a pretty big reduction in the amount of customer delinquencies. We talked about that a little bit in the last quarter. We had a couple of factors that do impact us from time to time, and that is our unbilled revenue. We saw a little bit of an increase there over last year, $2.3 million. And then this mark-to-market of our nonqualified plan assets was negative in the quarter, as you might expect, as the stock market in general was down for the quarter.

And then on Slide 7, just a graphical representation of some of those things. Key thing I would want to focus on, on Slide 7 is that our revenue increases, $0.12 a share, are higher than our core operating expense increases of about $0.09 a share. We had a very favorable third year rate increase in the California escalation process. And so that’s helping us. Remember, it is the third year of the California general rate case. So our opportunities for rate increases are limited. And so the other factors that you can see there are some of the other factors that I discussed on the prior slide.

Next, I would like to jump in on Slide 8 to give a quick California regulatory update. There’s a lot going on in California with 2 big cases for the company. There’s not a lot to report right now as far as progress. So expect that in the second quarter and the third quarter, there’ll be a lot more tangible information to report. But let me just give you a quick update here. So the California general rate case is continuing. We filed our rebuttal testimony earlier in April. And we’ve actually been having informal settlement discussions with the public advocate last week and this week. Those are confidential and cordial I think it’s fair to say. So, good conversations going on there, but nothing to report out of those sessions.

The California general rate case seems to be on schedule. And so we will – we are in a wait-and-see mode. Obviously, the schedules of general rate cases for water and electric utilities in California tend to slip. But in this case, we seem to be moving along pretty well. The issues in the GRC, as I talked about last quarter, are primarily due to the capital investment budgets. There is a big difference there in what the staff would like to see and what we proposed. Rate design is an issue and some of our expenses as is typical are issues. Not a major difference, again, as I had mentioned last quarter between the parties’ positions, are on our sales and on our water production mix. Those are two big factors that are going to hopefully help allow us to continue to earn fair authorized recover returns after the RAM balancing account mechanism goes away next year. And so that, combined with hopefully a good outcome on rate design will go a long way toward making a fair regulatory environment for us in California.

The second case that’s ongoing is the cost of capital case. We did file our rebuttal testimony in March in that case. And there have been some dialogue of potential settlement there. But generally speaking, we’re going to hearing and the hearings are actually next week. So we’ll start hearings next week in cost of capital. Remember, that’s a case that we filed with 3 other California water utilities and we are all asking for cost of capital for the same time period. That hearing in that case is delayed. That would have been decided by January 1 of this year, but the commission delayed that process. So we don’t know exactly when that’s going to become effective, when exactly we might get a decision in the case. It’s unlikely that we get a decision at this point before the end of Q3. But that’s the time frame. Maybe October, November, December is what we’re thinking right now in terms of the timing of a decision.

The issues for Cal Water are the capital structure and the cost of equity. And again, we talked about that on the last quarter call. If the CPUC were to adopt the company’s proposed cost of debt and there is no issue from the advocate on that, and accept the other things as no change, if you will, the annual impact would reduce revenues by about $11 million once rates become effective. So, keep in mind that we lowered our cost of debt by doing financing and refinancing at lower values and this is the proceeding where we’re passing on those benefits to our customers in California.

So next, I would like to turn it over to Shannon Dean to talk about ESG.

[Shannon Dean]

Thanks, Tom. I am pleased to report that we continue to make significant progress on our ESG efforts in 2021 and Q1 2022. First, we added ESG to our strategic framework, which is the touchstone for all employees that includes our mission, values, strategic priorities, and success drivers. We found that making ESG a part of our corporate planning process has provided the emphasis for engaging all employees in ESG and showing them how they play a critical role in helping us achieve our ESG goals. It’s also enabled us to work with subject matter experts throughout the organization to set meaningful, measurable short and long-term ESG objectives, which will drive further progress.

Just a few examples of our ESG objectives for 2022 and beyond, investing no less than $5 million in emissions reducing energy solutions over the next 10 years, increasing the use of recycled water in our operations to no less than 5% of total water supply to customers by 2035 and developing an enterprise-wide renewable power purchasing strategy by 2023 to help us lower Scope 2 greenhouse gas emissions. You can see more in our ESG report, which is now available on our group site. I will note that our objectives might not seem too flashy, but we want to be very disciplined about ensuring there is a feasible path to success rather than setting unrealistic or unattainable goals.

So that addresses planning. On the execution side, earlier this month, we published a SASB-aligned ESG report that references both GRI and TCFD. In the report, we highlight numerous projects that reflect our commitment to executing our ESG strategy, a few of which you see listed here. I’ll call out one of them, the climate risk assessment and adaptation framework. It’s an extraordinarily granular look at every one of our water infrastructure facilities throughout California.

And importantly, it does three things. One, it enables us to develop adaptation strategy, prioritize infrastructure investments, and address risks to disadvantaged communities. Two, it identifies varying climate risks in each of our service areas. And three, it provides the foundational framework for prioritizing risks and mitigation measures on an ongoing basis. Again, for more detail on these projects and many others, I do encourage you to take a look at our 2021 ESG report, which is available on our group website.

And with that, I will turn the call over to Marty.

[Marty Kropelnicki, President and Chief Executive Officer]

Alright. Good morning, everyone. Thank you. Before I jump into Slide 11, I want to give a little bit of background information. There has been a lot of things happening politically in California that affect the drought and how we respond to the drought. First and foremost, some of you may have noticed on March 29, there was a headline out there that the California state government, the federal government reached a voluntary agreement with water suppliers amid droughts. And that’s a fairly significant point to highlight for everyone.

While it did not include all the water wholesalers in the state, it does include about 66% of them. And we’re hoping to see the rest of them kind of get on board as we go through the summer months, and we know more work is being done to get more of the other wholesalers on target to sign the voluntary agreements. This allows something called voluntary agreements we put in place versus kind of forced allocations between the environment and making sure we have adequate water supply. The other thing it does, it puts about $2.9 billion on the table between state and federal funding. And so for those of you that have followed the water debate in the state of California, there is been a lot of tension between ag, urban, and the environment.

So by getting these two-thirds of the people signed up for this voluntary settlement agreement, it’s starting to put money on the table, which will allow us to move forward with things like restoring the habitat, allocating more monies to farmers if they need to allow the land to go fallow, and also sets up for the project, which is the Bay Delta tunnels, which will allow the state to divert more water when we have these intense storms that happen with climate change. So that’s a very significant event that took place at the very end of March. Again, it’s not a complete document. They are still working on getting other suppliers on board, but it is a big step in the right direction. So we were very encouraged to see that.

The second thing that happened on April 14 is Governor Newsom for the state of California, signed an executive order N-7-22. And this really does three things. One, it sets up the State Water Resources Control Board to have responsibility for turning out the executive order and overseeing the drought. And two, it sets up the possibility that urban water suppliers may be required to adopt more stringent water conservation strategies, including – this is the second point – the ban on irrigating nonfunctional turf.

So if you noticed this sets up the possibilities of, but the significance of it, these two events is more steps the state has taken to be better prepared for the drought and to deal with climate change more long-term. So the executive order sets up kind of the next stages of the drought, which are important, and that’s why we will move on now to Slide 11. So where are we with all this? Well, we had an extremely dry January and February and March. We were having a very dry April as well. But last week, we did receive a couple of feet of snow in the Sierras. While that sounds like a lot, it doesn’t move the needle a whole bunch. So if you look at where we were on our snowpack averages. Prior to the snowfall last week, we were about 26%, 27% of normal. After the snow that fell last week, we went to about 35%, 36% of normal.

So certainly, it will help a little bit, but we are certainly in the third year of our drought in the state of California, Hence, the Governor’s N-7-22 executive order, which is now pushing us forward into our drought mitigation plans. So what does that mean? 14 of our districts in the state of California are in a Stage 2 drought. We have filed to have the rest of our districts in a Stage 2 drought by the end of June. Just to remind everyone, one of the strategies that the state has adopted is a 6-stage drought strategy program. So whether you’re talking to San Jose Water, Golden State Water, Cal-Am, East Bay MUD, we’re all on the same definition of what our drought is.

So a Stage 2 drought essentially is up to a 20% drought reduction in water supply. It has penalties for waste to water. It’s a $50 penalty for the first violation, it’s $100 for the second violation. And it starts limiting the use of water for irrigation purposes between 1 and 3 days a week. And this – it made the New York Times this week, the L.A. Times are talking in Southern California, how Metropolitan Water is now limiting water irrigation for yards one day a week.

So again, it’s all contained in the staging process the state has put in place. What does it mean for Cal Water? Clearly, all of our districts will be on a Stage 2 plan here in the next 6 weeks. Our drought team has been meeting every 2 weeks since May of 2021. We also, if you recall, have a drought memorandum account that the commission authorized in June of last year that allows us to track the incremental costs associated with the route and apply for recovery at a later date. So we have been well on our way for some time preparing to go to Stage 2, Stage 3, and the potential for Stage 4 this year with the drought.

So we continue to move ahead with our plans. We continue to look at water supply at every district every couple of weeks. The executive team meets with the water supply team looking at water supply throughout the state. And we will continue to march along with our drought response plans as we go into the summer months. So there’ll be more to come on this regularly. Obviously, it’s going to be a topic that’s going to be around for the rest of this year, and we will update you every quarter as things change.

I want to move over to Slide 12 to talk a little bit about CapEx. Certainly, the $68.5 million in construction spending is I believe our second all-time high during the first quarter of the year. The team has done a very good job at mitigating some of the supply chain risks that have been common in the news for a number of months. I just want to point out that Cal Water, although the team has done an outstanding job at mitigating those risks to date, the longer the supply constraints stay active and continue to grow, the probability of effectiveness will continue to grow. So as of right now, we haven’t seen any delays in our capital programs. But certainly with inflation, some of the ability to get pipe, parts, fittings, etcetera. As we go out into 2022 and there are continued delays, it will start to affect our capital program. We don’t know how yet again. We have an excellent team that’s working on mitigating the supply risks.

But it’s going to catch up with us here at some point. So we are going to continue to do all that we can to keep our capital program on track. We will continue to closely monitor. But certainly, it’s a macroeconomic issue. That’s a global supply chain set of events, and we’re not going to be immune from that. So we will look to later this year to give more coverage on that as we see how things unfold here in the second quarter.

Tom, I am going to hand it over to you to talk about the ATM equity renewal we’ve been working on.

[Tom Smegal, Vice President and Chief Financial Officer]

Thanks, Marty. So I just wanted to let everyone know today that we expect to renew our ATM equity program in the near-term. We expect that this program will allow us to raise up to $350 million over a 3-year period. And if you’ll recall, the last ATM program that we ran starting in 2019, raised $300 million and was completed in Q4 of 2021. The proceeds, obviously, will be used for general corporate purposes, all the plans and everything that we talk about from time to time. We will continue to issue long-term debt as a way of balancing the capital structure between debt and equity. So you’ll continue to see us with long-term debt issuances as well. Marty, you want to talk about business development.

[Marty Kropelnicki, President and Chief Executive Officer]

So our business development pipeline continues to be robust. We did announce three new deals in the first quarter. Driftwood Valley, which is in Washington, that was a small system; Stroh’s Water, which is a fairly good sized system, 900 connections. It’s a system that we’ve operated on behalf of the owners for a year to 2 years that they ultimately have sold their system to us. That will add 900 connections.

And then KSSCS, which is a wastewater business on the island of Kauai. That’s our second acquisition on the island of Kauai. So if you look at where we are year-to-date with the two deals that closed, Valencia Water in New Mexico and Animas Valley Water in New Mexico, that’s about 3,500 new connections that we’ve added so far year-to-date. If you include the ones in the middle of that chart, which are awaiting regulatory approval and you add up all the total connections, that’s about 7,200, 7,300 connections so far kind of year-to-date that we have on the books.

The business development team continues to be very, very busy in all of the states that we operate in, Texas, Hawaii, New Mexico, Washington, and California. It appears that the market is going to stay strong for a while. Again, none of these are really big acquisitions, but we’re coming across some really nice kind of tuck-in acquisitions like the Stroh’s Water System or the second system that we’ve acquired on the island of Kauai.

So I think it will continue to be a good year for business development as we move forward in the second and third quarters. Tom, do you want to talk about the capital investment?

[Tom Smegal, Vice President and Chief Financial Officer]

Yes. So as everyone knows, I think by now, we’re – we permanently have added these slides on Slide 15 and 16 to just show the recorded and projected CapEx and on Slide 16 is the rate base. The only change here is to update the quarterly CapEx for 2022. You can see the $68.5 million year-to-date CapEx. And just to remind everyone that these bar charts, the yellow represents what we requested in the California rate case our projections in the other states that we operate in. And so that does not reflect any settlement. That does not reflect any change as a result of the processing of the case. And obviously, that is all subject to regulatory approval and potential settlement in that case.

Flipping to Slide 16. The same thing applies. We actually have not changed Slide 16 at all. These are the numbers that we had shown you at the end of the year. But just to remind everyone that these are the projections if the rate case were adopted as filed and in California and all other things as estimated. And so, those will continue to be revised as we get regulatory approvals and through the passage of time as well.

So Marty, I’ll let you wrap up on Slide 17.

[Marty Kropelnicki, President and Chief Executive Officer]

Great. Thanks, Tom. Well, solid first quarter. I think we’re glad it’s done and dusted, in the books. Obviously, we’re in the third year of the rate making cycle. So it’s always the toughest year in terms of rate relief. So, happy that we had good performance in the first quarter. As Tom mentioned, the majority of our revenue and net income fall in the second and third quarter. But overall, happy with the overall performance.

Also very happy with the ESG report that Shannon talked about. This is our second report. Obviously, we’re taking ESG very seriously. We are trying to make sure that we pick targets that are very marked and measurable that we can report back on a normal basis that we think are achievable. And so I encourage everyone to look at our ESG report and the progress that we’ve been making as a company.

As I mentioned, we continue to grow through acquisition, and we see the business development pipeline still strong as we move into the summer months of 2022. And the company is really focused on a couple of things, right. As Tom mentioned, on the regulatory front, we have the cost of capital proceeding, and we have the California general rate case, which has taken up a lot of time for the regulatory affairs team. We’d like to get those wrapped up this year and working through that with minimum disruptions. The other thing we had going on is obviously fire season, and the operating teams have already launched their fire response teams for the year. We’ve done all our training for the year in anticipation of another hot dry season going into the summer months.

So certainly, we have a lot to work on in the second and third quarter. Focus is going to be on the regulatory side. And hopefully, we will have more news on the general rate case and cost of capital at the end of our conference call in the second quarter.

So Jeff, with that, I’m going to turn it over to you, and we will open it up for questions, please.

[Operator]

[Operator Instructions] Your first question comes from the line of Ben Kallo from Baird. Your line is open.

[Ben Kallo, Baird]

Hello, how are you, guys?

[Marty Kropelnicki, President and Chief Executive Officer]

Good morning, Ben.

[Tom Smegal, Vice President and Chief Financial Officer]

Good morning, Ben.

[Ben Kallo, Baird]

Thanks for taking my question. Maybe – I hope all of you guys are well. Tom, maybe just to talk about cadence and seasonality again, just to remind us all for this year and into next year. And does the – if you have delays because of supply chain issues and CapEx, does it impact this year at all or how does that flow through or is it more of a next year type of hit? Thank you.

[Tom Smegal, Vice President and Chief Financial Officer]

Yes. That’s a good question, Ben. So really, what we focus on with CapEx is the continuing effort over the long period of time. Because really what we’re talking about is infrastructure replacement, reliability, water quality, and the things that our customers are hoping to get out of the water systems. And so if we tend to have disruptions and have a lower CapEx spending this year, it’s not going to affect us. It’s not really going to affect us next year because of the first year of the general rate case. But it will start to affect the revenue in that first escalation year if that continues, if we are unable to meet the expectation that’s set in the California general rate case. So, that would start to impact the ability to earn additional money in 2024 and 2025. That’s where you would see it if we can’t recover and get back up to speed through some of these disruptions. Hopefully, that answers the question.

[Ben Kallo, Baird]

It does. And then, Marty, you talked about this $2.9 billion of Federal state funding. How would that impact you if that moves forward?

[Marty Kropelnicki, President and Chief Executive Officer]

It’s more an indirect effect for us. Obviously, it affects how the water is captured and moved throughout the states and that water goes to wholesalers. And then we – half of our water, we buy from wholesalers, half of that water we produce through our own wells. So, this really centers around the Bay-Delta arguments and the Delta Tunnel project, where you just have – you have had that constant tension – a lot of tension between the environmentalists, the farmers, and urban water users. So, that money going on the table goes to help mitigate issues that each of those parties have that have kept them from getting into agreement on how to fix these things. So, obviously, environmentalists want to have a minimum amount of water flow for the salmon and salmon spawning. The farmers want to make sure they have enough water to water their crops or at least have a crop rotation program where they are compensated for not planting crops in certain years. And urban water users like Cal Water, want to make sure we get enough water from our suppliers that we can make sure we have adequate supply for our customers. So, it’s really – Ben, it’s really a lot of State and Federal projects that get those three parties aligned to come together to find a long-term solution to the ecosystem issues that have been affecting the State over a number of years, and it helps us better prepare for climate change. So, there is no direct “dollars” that will affect Cal Water, but it will affect how we get water and who we get water from.

[Ben Kallo, Baird]

Alright. Thank you. And then just on the cost of the capital, what does the impact of the delay going from you guys talked January to October, September-October timeframe. What was that and how does that impact you?

[Tom Smegal, Vice President and Chief Financial Officer]

Ben, it’s really uncertain right now. One thing that we don’t know is when the rates will become effective. And so that’s key, obviously, the overall package that the Commission comes up with in terms of return on equity and cap structure determines what kind of a revenue change there might be coming out of this. But as far as the timing goes, it matters as to when that starts accruing to us either positively or negatively. And I will say, just in general, we asked for no rate increase as a result of the lower cost of debt. And we had asked for a higher cost of equity. And so there is limited potential for rate increase out of this and more likely would be flat rates or rates that would be decreasing. So, we will have to wait and see on the timing. That is the open question right now.

[Ben Kallo, Baird]

Okay. Thank you very much.

[Tom Smegal, Vice President and Chief Financial Officer]

Okay.

[Marty Kropelnicki, President and Chief Executive Officer]

Thanks Ben.

[Operator]

Your next question comes from the line of Jonathan Reeder from Wells Fargo. Your line is open.

[Jonathan Reeder, Wells Fargo]

Hey. Thanks for taking my question.

[Marty Kropelnicki, President and Chief Executive Officer]

Hi Jonathan.

[Jonathan Reeder, Wells Fargo]

Ben has asked my questions already, but I wanted to just stick with the cost of capital for a couple more. You mentioned that there has been some settlement dialogue on the cost of capital. Can you expand on that a bit? Like has the potential for settlement increase, potentially driven by the recent increase in interest rates and stock market volatility?

[Tom Smegal, Vice President and Chief Financial Officer]

Well, Jonathan, it’s a good question. As you know, we as a company and the California Commission are very encouraging of settlements and settlement discussions. I think probably ever since we – the company has filed their rebuttal testimony, there has certainly been – in any case, you would expect there to be settlement dialogue. I think that one thing that you should take is that we are starting hearings, I think next Tuesday. There is no settlement announced yet. So, it’s not – we are running out of time. If someone is going to come up with a settlement, you would expect it to be coming in the next day or two days. And so nothing has happened. Nothing has happened yet that’s been announced. And so I can’t really comment obviously about the internal workings of settlement. But I know that all parties have worked in good faith to see if there is a potential for a settlement.

[Jonathan Reeder, Wells Fargo]

Okay. So, in terms of the way we should view it, if the hearings take place then the settlement is kind of off the table. I thought you could still potentially file a settlement.

[Tom Smegal, Vice President and Chief Financial Officer]

You can. But typically, we see settlements before hearing or we see a request to delay hearing in order to continue settlement. So, those are the kinds of things I would look for. But you are right. I mean as there could always be a settlement afterward. And just to your other comment, I think that the thing that’s a little bit tricky here is that a lot of the movement in the capital markets has happened since all of the testimony was produced. And so the real question is whether the commission itself and the administrative law judge are going to look at the testimony of the experts, which really relies on 2020 data and some 2021 data, or whether they are going to look up from the table, look up from their desk a little bit and notice that the capital markets have really shifted in the last four months or five months and whether to take that into account or not. We do have – or we have had and have requested again, cost of capital adjustment mechanism that would adjust the returns on equity if the Moody’s AA utility bond curve goes up or down more than 100 basis points. So, there is that opportunity if that gets included in the next cost of capital as well.

[Jonathan Reeder, Wells Fargo]

Okay. I haven’t actually looked at that, the Moody’s and the cost of capital. If we were using, I guess the test period, which I guess what would it end up being perhaps for the October 2020 through September 2021 could perhaps be the test period? Would it be first trigger just...

[Tom Smegal, Vice President and Chief Financial Officer]

So, if that’s the test period, what we have internally calculated and this is updating every day, obviously, as the rates change every day. It does not appear – the rate is 100 basis points higher than it was at the end of that period, but it hasn’t – but it’s a weighted average. So, it wouldn’t necessarily trigger. If rates continued from today through October, it wouldn’t necessarily trigger this year, but it would theoretically trigger next year in that next evaluation for the period of 2024, I guess. But that’s asking a lot to assume that interest rates are going to be in a particular place for 16 months, 17 months or whatever that number is. So, there is a lot of uncertainty about that. But certainly, the rates have gone up pretty considerably. And the question is, again, ultimately, is the commission going to be more interested in adopting a little bit higher return on equity as a result of the change in the capital markets. And we are certainly hopeful that that is the case. But obviously, the commission does what the commission does here.

[Jonathan Reeder, Wells Fargo]

Yes. No, I was kind of thinking back to whatever it was, 2012 or whatever, where the order finally came out, but then the mechanism triggered it down. If we might have something similar, if we have an order late in the year, but maybe you get a trigger up then or something.

[Tom Smegal, Vice President and Chief Financial Officer]

I think just with the math, I think in order to trigger up this year for 2023, you would have to have an additional increase in rates, so that that weighted average over the 12 months period, it gets above the trigger point. We just don’t see that happening at the current level of interest rates. But it certainly is off quite a bit and that’s certainly a story to be aware of, yes.

[Jonathan Reeder, Wells Fargo]

Right. Okay. No, I appreciate the color there. And then I guess given the uncertainty of the effective date of the cost of capital order, including whether it’s retroactive at the beginning of 2022. I am guessing Q1 doesn’t reflect any revenue adjustment from the lower cost of debt.

[Tom Smegal, Vice President and Chief Financial Officer]

That’s correct.

[Jonathan Reeder, Wells Fargo]

Okay. Alright. Thanks for the details and good luck as you deal with both the water supply challenges out there as well as the CapEx supply challenges, I guess you would call it.

[Tom Smegal, Vice President and Chief Financial Officer]

Great. Thanks Jon.

[Marty Kropelnicki, President and Chief Executive Officer]

And I think we are in for a fun summer.

[Operator]

Your next question comes from the line of Ben Kallo from Baird. Your line is open.

[Ben Kallo, Baird]

Hi. I just wanted to follow-up, because I received this question about, I don’t know how closely you are watching this, H.R. 3404, FUTURE Western Water infrastructure and drought resiliency. Is that what you were speaking of, Marty, and does it have any legs since the bill was introduced?

[Marty Kropelnicki, President and Chief Executive Officer]

If it was just introduced, Ben, I am sure our government affairs team is watching it. But bills in the California, it has to go through the Senate. It has to go to the assembly. It has to go through the two appropriations committees and they can move around quite a bit.

[Tom Smegal, Vice President and Chief Financial Officer]

So Ben, I think I was alerted to this yesterday. Sorry, Marty didn’t know about my conversation yesterday. That’s a Feinstein-Padilla bill. I believe that was introduced in the U.S. Senate. And the one thing to take away is that the way that Federal Legislation works, there are only a very few pieces of legislation that ever get adopted out of the U.S. Congress and Senate. And so if we see these provisions, they will be part of some larger bill at some later date. And really what we are expecting and what the bill introduced was the notion of money, and that’s similar to what you are talking about, Marty, as far as – so it’s a little bit different story than the money that Marty was talking about with respect to the Delta settlement. But really, when you think about the infrastructure problems in the U.S., any amount of additional money on that wholesale supply side is going to be valuable to us in increasing our reliability to our customers. Obviously, we are in the business of investing capital in our systems, but there is a lot of capital to invest in our systems. And as you know, we have been investing about $300 million a year and we expect to be able to continue to do that for the foreseeable future that there is that amount of need there. But really, we are talking about the infrastructure, particularly in California that gets water to us that we can buy water from, for the San Francisco Peninsula and all of these other places that import water.

[Marty Kropelnicki, President and Chief Executive Officer]

Yes. I know I haven’t read the details of the bill, Ben. But in my discussions with Senator Feinstein and Senate Padilla, the two big things they were focused on really pertain to wildfire. And federal wildfire fighters make $15 an hour. And so what’s been happening when we have these wildfires is they don’t – and they have happened more on federal property is they don’t have appropriate resources to fight those fires. And so I got a hunch what’s in this bill is raising the wage of the firefighters to a livable wage in the State of California. So, when you have people graduating from the wildfire academies, which is typically taught at the junior college level, that they stay in the job for a while. What happens is they get their training and then they end up going to a city or municipal firefighting district and the Feds don’t have resources. If you remember the fires last year that we had, they were predominantly on federal territory.

[Ben Kallo, Baird]

Thank you very much guys.

[Tom Smegal, Vice President and Chief Financial Officer]

Thanks Ben.

[Operator]

[Operator Instructions] There are no questions at this time, presenters. Please continue.

[Marty Kropelnicki, President and Chief Executive Officer]

Okay. Thanks Jeff. Well, everyone, thank you for your time today to go through our Q1 results. Obviously, Q1 is always a pretty kind of benign quarter for us coming out of year-end and coming off of a fresh 10-K. We will look forward to giving everyone a detailed update on our cost of capital, general rate case, and drought conditions in the state at the second quarter earnings conference call scheduled at the end of July. So, until then, be safe, thank you for joining us, and we will talk to you again soon. Thank you.

[Operator]

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.