California Water Service Group
NYSE:CWT
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Estee Lauder Companies Inc
NYSE:EL
|
Consumer products
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Church & Dwight Co Inc
NYSE:CHD
|
Consumer products
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
American Express Co
NYSE:AXP
|
Financial Services
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Target Corp
NYSE:TGT
|
Retail
|
| US |
|
Walt Disney Co
NYSE:DIS
|
Media
|
| US |
|
Mueller Industries Inc
NYSE:MLI
|
Machinery
|
| US |
|
PayPal Holdings Inc
NASDAQ:PYPL
|
Technology
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
43.77
55.5
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Estee Lauder Companies Inc
NYSE:EL
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Church & Dwight Co Inc
NYSE:CHD
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
American Express Co
NYSE:AXP
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Target Corp
NYSE:TGT
|
US |
|
|
Walt Disney Co
NYSE:DIS
|
US |
|
|
Mueller Industries Inc
NYSE:MLI
|
US |
|
|
PayPal Holdings Inc
NASDAQ:PYPL
|
US |
This alert will be permanently deleted.
California Water Service Group
You don't have any saved screeners yet
Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the California Water Service Group Third Quarter 2022 Earnings Conference Call. [Operator Instructions].
I'd now like to turn the conference over to David Healey, Vice President, Corporate Controller. Please go ahead.
Thank you, Regina. Welcome, everyone, to the 2022 Third 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; Paul Townsley, Vice President, Corporate Development; and Greg Milleman, Vice President, Rates and Regulatory Affairs.
Replay dial-in information for this call can be found in our third quarter earnings release, which was issued earlier today. The replay will be available until December 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'd like to take a few moments to cover forward-looking statements. During the course of the call, the company may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties and actual results could differ materially from the company's current expectations. Because of this, 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'm going to pass it over to Tom to begin.
Thank you, Dave, and welcome, everyone, to our third quarter earnings call. I'm going to be going through -- in fact, all of our presenters today will be going through the slide deck with reference to page numbers, so you can follow along, and I believe on the webcast slides will track with us.
So I'm going to start on Page 5 of the slide deck for a quick summary of the financial results for the third quarter. You can see the numbers there that our operating revenue was up $9.6 million or 3.7%. Our operating expenses were up $15.8 million or 8.5%. The result of those 2 items is that our net income was down $6.5 million or 10.5%, and our earnings per share were down $0.17 from $1.20 to $1.03. I do want to highlight on the sheet, and we'll be talking about it later that our CapEx was up in the quarter from $69.2 million to $77.5 million.
Similarly, on Slide 6, our year-to-date financial results. We can see net income is down $21.2 million on a year-to-date basis, and that's about -- that's $0.50 on a year-to-date basis in an earnings per share cents.
Turning to Slide 7 for a little bit of the color on the quarter. So we've been talking all year about our unbilled revenue and about the changes in valuation of our nonqualified plan assets. And in this quarter, we actually saw an increase in our unbilled revenue accrual. That is largely because the accrual was so low in the last quarter, and we talked about that in the last quarter. So we saw unbilled revenue go up this quarter.
However, we continue to see a softness in that mark-to-market valuation of our nonqualified plan assets, and that was a $2 million change there. The operating expenses went up, as I mentioned earlier, due to inflationary factors for the most part. We saw wage increases, increases in the cost of goods and services. We saw 2 items that are probably pretty bouncy. And we did see them in the quarter. Our uninsured loss expense was up in the quarter, that is when someone is injured or makes a claim against the company, that's somewhat volatile.
And then we did increase the reserve for bad debt and we'll talk about that a little bit later in the call, but that is an increase as compared to the Q3 of 2021.
For the year-to-date, really, the bulk of the description year-to-date and the change in earnings has to do again with the unbilled revenue and with the change in the valuation of our nonqualified plan assets. You can see of the $21.2 million decrease in net income attributable to CWT. It was a $9.4 million reduction in unbilled revenue, $11.4 million associated with the planned assets. Again, the unbilled revenue, as we mentioned last quarter, we expect to normalize by the end of the year with the change on a year-to-year basis, no more than plus or minus $2 million. So we'll continue to evaluate that as we go forward.
And I did want to highlight actually for the year-to-date that our financing program has been going very well. We issued 470,000 shares during Q3, and we issued 2.2 million shares in the last 12 months in our ATM programs and so very happy with the results there.
I won't dwell on the bridges, those say essentially the same thing that I was just saying in visual form. And then on our call this morning, we're going to talk quite a bit about our regulatory affairs, particularly in California.
On Slide 11, I'm going to start by giving you an update on the California cost of capital case. So there was no update during the quarter from the administrative law judge. As those who were on our call last quarter, will know the case was submitted in June. All the parties completed their testimony and their -- the briefs and the reply briefs, those were all completed in the summer. And so we're all just waiting on the administrative law judge to issue a proposed decision and then the commission to issue a decision in the case.
The calendar is getting a little tight here. There is still a potential that the CPUC could issue a final decision this year. But in order to do so, we would have to see a proposed decision from the judge really within the next 2.5 weeks because the commission voting meeting schedule in December is very light due to the holidays. We would expect that if we got a proposed decision after November 15, and we would not get a final decision in 2022. And so it's looking increasingly likely that a decision in cost of capital will come later than the end of the year.
Because of the delay in issuing a decision, I know that many of the analysts have been focused on, obviously, interest rates going up in the economy since the time that we submitted, we can't determine how the commission is going to evaluate those changes. We know that the testimony that was made in June did include some evidence of the inflation and the interest rate changes that had happened up to that point, but we're not certain how that might impact. And we're not certain about the impact of potentially the water cost of capital adjustment mechanism. And that -- whether that would trigger or not depending upon the final outcome of the case.
And just a reminder, as we've been saying that given our financing program, the proposed cost of debt in our application was quite a bit lower than the last adopted cost of debt. And what that means is when the case is eventually decided and when the commission sets a starting date at that time, we will have about an $11 million reduction to the debt cost, and that we expect to be passed through to customers. We don't yet know what the timing is on the effective date of a decision. And so the company has not reserved for that amount or any other amounts associated with potential outcomes of the cost of capital case.
Next, I'm going to turn it over to Greg Milleman, for Slide 12 to give an update of our general rate case.
Thank you, Tom. As you can see a lot on the slide already, we did reach a settlement with the public advocates office primarily on non-revenue items that was filed with the commission. The case is now in the hands of the ALJ to write the decision, but it's unlikely we will get that decision before the end of this year. Because of that, we plan to file for interim rates in the fourth quarter to be effective January 2023. Those rates are subject to refund and will be trued up based on the final outcome in the decision.
Moving to Slide 13 with a focus on decoupling. In the -- a significant change for Cal Water starting in 2023 is the loss of the mechanism to decouple sales from revenue known as the RAM. The bad end, the settlement with public advocates reduces our revenue volatility and has realistic water production costs. Further, in the event that the drought persists, the commission has the mechanism that allows water companies without [indiscernible] to track lost revenues and lost revenues due to the drought and a memorandum account for potential future recovery. So we'll be filing to open that as well before the end of the year.
And then with that, I'll turn it over to you, Marty.
Great. Thanks, Greg, and I'm on the bottom of Page 13 for everyone that's following along. Some of the big news for us that came out on the last day of the quarter, September 30, was Governor Newsom signed the law for the State of California Senate Bill 1469. Senate Bill 1469 ran largely unopposed as the bill we've worked on the last couple of years, which is a big win for our water industry within the state of California. The bill does not mandate decoupling, but the bill clearly says it's the intent of the legislature to ensure that Class A water corporations are authorized to establish revenue adjustment mechanisms that provide for full decoupling of sales and revenue in order to incentivize conservation.
So we spent the last two years working on this bill with the other water companies, [indiscernible] water companies in the State of California. It was nice to see the governor signing the law and put on the books. Now shortly thereafter, in fact, last week, on the 21st, the CPUC filed a motion with the California Supreme Court to dismiss the court case that we filed that's centered around decoupling. And there's a very finite detail here. The court case that was filed with the State Supreme Court wasn't necessarily about the final decision to eliminate the pilot program of decoupling. It was really about the lack of due process that the commission didn't follow their own process to make that determination.
And then, of course, cost us or we didn't have the opportunity to get adequate information on the record for the commission to make an adequate on decoupling. So there's a finite detail there. At this point, I still believe the State Supreme Court case will move ahead since the court did accept the basis of our argument, which is lack of due process, although the CPUC did file a motion to dismiss. So we are responding to that. But based on where we are right now, I believe the court case will continue to move forward on the basis of the original filing, which is lack of due process.
So big win in the state legislature with Senate Bill 1469. We're continuing with the court case in the State Supreme Court about lack of due process.
Moving on to the next page, Page 14 to talk about the drought. Let's start off talking on the left-hand side of the slide, where we are with our memo account. If you remember, in 2021, the Governor declared a drought emergency. That allowed us to establish a memo account to track incremental costs associated with our drought response. So things that we're doing above and beyond what's in our current rate case to respond to the drought.
For Q3, our incremental drought expenditures were about $400,000. So they're expensed in the period. They go to the memo account. And our total in that memo account since its inception of 2021 is about $1.4 million. So there's $1.4 million of droplet items that we've expensed in the current period that will seek future recovery on at a later date.
Moving on to the right-hand side of the slide. Conservation is working, and this is why we think decoupling is really, really important. In California, customer usage is down about 19% in Q3 as compared to our adopted numbers. That's down about 7% compared to 2021. Earlier this week, we filed our numbers with the State of California, which we're required to file every month. And average consumption was down about 10% in the month of September alone. That's the average number. I want to give you a sense of the variance, though with some of the districts that had large savings.
Westlake in Southern California, their consumption was down 36.6% in the month of September. Palos Verdes, which is South of Westlake on the L.A. Peninsula, their consumption was down 25% in the month of September. And Los Altos, which is just down the street from us here in Silicon Valley, their consumption was down 26% in the month of September alone. So again, this is why we believe decoupling is really important.
That second bullet point -- given the declines that we've seen in consumption, given our drought response program, the balance in our decoupling account is now $94.8 million. So we'll be found to recover that at a later date.
Looking at the NOA forecast for the fall and for the winter now that we're officially in fall. They're forecasting [indiscernible] conditions, which tends to be warmer weather for us, which means less snowfall and potentially less rain. Obviously, we'll have a good look at winter between now and when we announced earnings at the end of February. While we're hopeful that we have a wet winter, [indiscernible] the nature showing something to the contrary, again, that's why the decoupling mechanisms are so important because it allows us to aggressively pursue conservation for our customers and helps ensure resiliency of our water supply.
So the continued drought conditions going into '23, we expect them to continue. And again, in the face of climate change, decoupling is really important. Water resiliency is really important. So if you read our ESG reports, we're going to continue on the path we're on to promote conservation and make sure we have a resilient supply going into the future years.
Going on to the next slide, Slide 15, to talk about the capital program. Despite a lot of headwinds, a lot of economic headwinds, our capital program, remains mainly on track. We had an increase of 12% year-over-year on our capital investment program. We also call it our infrastructure improvement program. And we've got a 6.9% year-to-date increase in our capital investments. So happy with how that's going. But certainly, as we deal with supply chain headwinds like all of us are dealing with right now, the longer those headwinds continue, the more likely will, at some point, they will start affecting us.
We continue to monitor the supply chains and the procurement team here at Cal Water and the engineering team has done an outstanding job, doing a lot of pivoting and bending and turning and thinking about new ways to stay ahead of the supply chain issues. In particular, ductile iron pipe, it's now a 12-month lead time to get ductile iron pipe. And when you have a large main replacement program that starts to pose some challenges.
So we continue to look for areas that we can reduce risk in our supply chain, including the potential for stockpiling raw materials used in our capital production process and stockpile those for future days and future weeks and future projects ahead. As we move into the fourth quarter, just to remind everyone, construction activity can be adversely affected by weather, but based on the in conditions. I think we're going to have a fairly decent fourth quarter when it comes to capital investment.
I'm going to hand it over to Tom to give you an update on the customer COVID debt updates.
Thank you, Marty. So as you'll recall us saying at the end of the second quarter, we were authorized finally by the California Public Utilities Commission and by the governor to start the process of shutting off customers for nonpayment. Remember that during the COVID pandemic, we had been held to not shutting anyone off from March of 2020 until the summer. And while we had gotten California State aid to pay a number of customer bills last year, we -- that reduced the number of delinquent accounts.
It's still going to take us months and maybe many months to address the remaining 90-day delinquent accounts. And so we are working through that process now, starting that process late this summer. We did have some success in the quarter, reducing the balance that is 90 days past due by $3.5 million. That's an important step for us. It's a good sign for our program. In comparing our third quarter of 2022 to the third quarter of 2021, however, in that quarter last year, we had recorded the State aid. And therefore, the customer delinquency balances had dropped dramatically in the third quarter of 2021.
And that's why you see an increase in our bad debt reserve this year. And we're very encouraged by the collection program that we have in place now. We do expect that to continue and accelerate as we get into the fourth quarter and into the first quarter of 2023, and we look forward to talking about how successful we are in bringing down that bad debt balance next year.
Next, I'd like to turn it over to Paul Townsley to give us a business development update.
Thank you, Tom. I'm on the next slide, which is an exciting slide. We continue to set a brisk -- a very brisk pace in our utility acquisitions with 10 announced deals in process. As you can see on this slide, we have 5 new announced deals this year. They include the Camino Real Utility in Texas, the Kukui'ula South Shore Community Services, otherwise known as KSSCS on Kauai in Hawaii, the Monterey Water System in New Mexico, the Bethel Greenacres system in Washington and the Stroh's Water System also in Washington.
In addition to those 5, we also have 3 other deals that have been approved by the respective state public utility commissions and we're going through the final closing process. Those include HOH utilities, again, in Hawaii. Keauhou Wastewater on the Big Island in Hawaii and the Skylonda Water System in California.
And then finally, on the slide, you'll see that we have closed 2 deals so far year-to-date. That -- they include the Animas Valley System, also known as Morningstar Water in New Mexico and the Rail Yard Utility in Texas. So all of these kind of all put together, they represent up to 8,600 new water connections and about 10,000 new wastewater connections that are under process this year.
As you can see, we're growing in each of the states that we have utilities and that our recent entry into the state of Texas already looks quite promising in terms of growth. Finally, our acquisition pipeline remains robust, and we anticipate continued opportunities coming next year. And with that, Tom, I will hand it back to you.
Thanks, Paul. So as per usual, I've included in our slide deck for the quarter, the projection and progress of our CapEx and our rate base. Once again, the yellow bars on Slide 18 and 19 represent what we filed for in the California General Rate Case. And so obviously, with that case pending and no settlement on CapEx for the case., We don't have a way yet to adjust those numbers to what might be authorized by the commission. But I do show and reflect here, the $222 million year-to-date CapEx in our total systems throughout 2022.
Marty, I'll send it over to you for a wrap up.
Great. Thanks, Tom. In closing, Q3 was about in line with what our expectations were within the company. Obviously, we're not immune to the inflationary issues that we're all experiencing, and we're seeing inflationary creep move into our P&L. That, coupled with the regulatory lag that we would typically see in the third year of the rate case. It certainly is affecting our profitability, but we are performing where we have budgeted to. So we're very happy with the outcome where we are in the third quarter.
The market headwinds, we expect that to continue as the press release and as Tom mentioned, we do have certain planned assets associated with the nonqualified retirement plan, while the changes get recorded below the line, we're still required to essentially evaluate and value those assets at the end of and it flows through below the line on our P&L. So there's no buying and selling of assets there, it's just the change in asset value given that we're seeing in the market. And we expect that's going to continue into 2023 as we deal with some of these strong economic headwinds that we're dealing with.
As we go into the fourth quarter and into 2023, what are we going to be focused on. Obviously, concluding the cost of capital in general rate case are at the top of the list. Those are 2 very important proceedings for us and affect the biggest book of business that we have, which is our California utility.
As I mentioned earlier, we expect the drought to continue into 2023 and our strong drought response and also dealing with the supply chain issues. Again, the team has done a great job on the supply chain side. As long as these headwinds continue, the more likely they are to start affecting us at some point here in the future.
In addition, as Paul mentioned, we want to continue to execute on our growth plans and our business development pipeline. So while we're all dealing with the economic uncertainties that are around us each and every day right now, our balance sheet has remained strong. We have plenty of cash. We have been able to continue our growth in our capital program as well as our business development pipeline. And we remain mission-driven serving our customers and doing what we do best, which is being a water and wastewater utility. So going into the fourth quarter strong, and we'll go into 2023, strong despite all the headwinds that we're facing as a company.
I want to take a moment and close out on setting a little different for this quarter. One, I just want to point out, I hope everyone saw the press release that we appointed Ms. Terry Bayer to be our Lead Director, Terry is an outstanding leader, seasoned executive and has been on the Board since 2014. She started to chair our Capital and Investment Committee in 2019. In September, we nominated her to be our Lead Director. She's just an outstanding person. We're very fortunate to have someone of Terry's caliber on the Board. She has a strong background in public health, and she also has her [indiscernible] from Stanford University. And I hope all of you will get a chance to meet Terry at some point here in the future because we're very, very honored to have her as our Lead Director.
And then lastly, this is Dave Healey, our Corporate Vice President, Corporate Controller's last conference call with us. Dave was going to be retiring at the end of December. And Dave started with us over 13 years ago as our Director of Financial Reporting. He was promoted to our Corporate Controller, and then ultimately, he was promoted to our Vice President, Corporate Controller and Principal Accounting Officer. Dave has done an outstanding job for Cal Water, not just on the financial reporting side, but also on the tax strategy side. Dave is one of the where individuals in the accounting world that is excellent in taxes and also excellent financial and he is going to be dearly, dearly missed. And we will anticipate announcing Dave's replacement hopefully by the end of the year.
But Dave, I just want to say thank you for all you've done at Cal Water and it's been an honor to have you on our team.
Welcome. It's been a blast.
So with that, Regina, we will open up the line for questions, please.
[Operator Instructions]. Our first question will come from the line of Angie Storozynski with Seaport.
Lots of questions, but let me maybe first start with taxes now that you mentioned them. So there seems to be a pretty substantial increase in year-to-date income taxes, like, I think, close to $3 million. Is it just timing related? And is there some true-up happening in the fourth quarter?
So I'll go ahead and answer that. This is Dave Healey. So part of -- if you recall, when the corporate income tax rate decreased to 21% in 2017, the way utilities handle that is the reduction is moved to a long-term liability and refund it to rate payers. And it's the timing of when the refunds are refunded to rate payers. So the 2018 and 2019 refunds to our ratepayers were paid to them during the years 2021 and 2022.
In 2022, it's $4 million less than was refunded in 2021, and that's what's driving the $4 million decrease. So it's part of our effective tax rate calculation and that's what's causing it.
But is it a decrease because this is an increase, right, in the operating costs? You're basically -- what is...
Right. So when we do the tax refunds, how it's recorded as a reduction to income tax expense. So there's more of a reduction in 2021 than in 2022.
I understand. So it's fair to assume that this $4 million year-over-year delta persists through the end of the year?
Yes. So it will continue through the end of the year and then it flattens out for the next 3 years. So there was just a little catch-up. The catch-up was for the years 2018 and 2019, and it only was in years 2021 and 2022.
Okay. I understand. Very good. And then secondly, again, as I'm just going through the results year-over-year, there seems to be a pretty meaningful pickup in nonregulated expenses. And so I assume that some of it has to do with those uninsured losses. But again, it's like a $10 million increase year-to-date, again, year-over-year. If you could explain what -- what it's in...
So when we talk about the unrealized loss on our nonqualified pension plan investments, it's recorded in nonregulated expenses, and that's what's driving that change.
That's the mark-to-market, yes.
Okay. That's fine. So I understand that one. Okay. So then going back to the regulatory proceedings that are still pending. So the GRC, in light of the inflation that you see in your cost structure, how much of it is already reflected in that -- in the pending GRC? And is there a way to basically true up some of the costs that you're seeing before the final decision is rendered?
That's a great question. Greg, do you want to take a first crack at that about how we incorporate new inflation into the GRC process?
Absolutely. As part of the settlement and undisputed items, we made a request with the commission that at the time the proposed decision is put forth that it reflects the most current inflation factors on all of our expenses, and that would be the mechanism that we would address the rising inflation that's going on right now from when we filed the case in July 2021.
And then...
There is still an update -- I'm sorry, so we're still -- you're about to file an update before the proposed decision is issued?
No...
At the time, I think...
Go ahead, Greg.
I was just going to say at the time we filed the case, we estimated what inflation would be for the years 2023 and has significantly changed. But as part of the original filing, we made a special request that has not been disputed by public advocates that says when the commission puts forth the proposed decision that they will update all the expenses based on the most current inflation factors at the time. So, okay.
Angie, the other thing to add there that Greg didn't mention is remember that in California, we have escalation increases in the second and third year of the GRC and those also incorporate the most recent inflation factors. And so while Greg is talking about incorporating into 2023 calculations for rates, there's also a 2024 and potentially '25 if this continues to be a high rate of inflation.
Understood. Okay. So moving on to the cost of capital proceeding. So I mean, I understand that there's a delay. I mean, yes, there is a delay. But -- the -- I mean, is this really a debate as to when the new cost of capital kicks in? I mean, I thought it was pretty obvious, it's 1/1/22 and it is not dependent on the exact timing of the final decision. Now it's basically, the review period is 1/1/22 through December 31, '24, no?
So it's an interesting question. I think that you have to look also at what's going on with the California energy cost of capital and the pending case there, what's happening with the proposed decision from the administrative law judge and the alternate proposed decision of the President of the Commission.
The issue that we have and the reason that we are not recording the reliability associated with the lower cost of debt, is that the procedural steps that the commission would normally take to ensure that rates could be made retroactive have not been done. There was no filing for interim rates. There's no memorandum account to track in term rates. Those are the normal procedural processes that would require -- would allow the commission to go back in time. And so right now, that's the situation in the process.
So we're still waiting to see what that decision says. And obviously, we'll look to whatever that decision ends up saying, but we don't have any evidence 1 way or another at this point. We're obviously disclosing the amount in case it does go back. And so you have that in the slide deck, and it's in the 10-Q as well.
Okay. And my last question on the -- if I understand this $11 million associated with the lower cost of debt, but -- and I see that you're issuing equity quite a bit. Now what is your expected equity layer at the subsidiary -- or the California subsidiary by the end of the year? And if this cost of capital proceeding were to lower the allowed equity layer in line with what the year-end number will be, what would be that reduction in revenue?
So Greg, I'm not sure that we've calculated the reduction in revenue associated with adopting the ratepayer advocates position associated with that. And Angie, I'm sorry about that. But it's several additional million as I think I understand it that might be taken out of the return. As far as the first part of the question goes, I believe that if you look at the financials in the 10-Q, I think we're about 50-50 right now within California as our current equity capital structure.
And so that you'd say is actually probably as high or higher than what the commission staff had recommended. And so, obviously, there's an opportunity at any time for comments to the decision when we get -- any time we get a proposed decision, that will certainly be part of our comments that, look, they said our cap structure was below 50%. And in fact, it's already at 50% as of the date whenever that comes out. We expect with the ATM program that will continue to rise. And we obviously have a plan to get to the 53.4% equity and expressed that plan to the commission, the staff is just completely using a historic evaluation, which we don't think is appropriate at this time.
[Operator Instructions]. Our next question will come from the line of Jonathan Reeder with Wells Fargo.
Yes. Just wondering, do you have any insight if the ALJ is currently drafting the ? Or is there still potentially other high-profile cases still sequenced be for it?
Jonathan, it's difficult to say the administrative law judges work independently at the commission. For those of you who don't know, I was Head of Regulatory for Cal Water for quite some time and work with the commission before that. So I feel comfortable saying I know a little bit about how ALJs work. You'd have to look at what other cases this particular ALJ has. And then you'd have to evaluate whether -- it's sort of like you need to be a fly on the wall, so to speak, to understand is a commissioner. I think it's Commissioner help that has the case. Is she driving other -- are there other things that she's working on that are keeping her from helping the judge issue a decision in this particular case.
And I don't think we know the answer to any of those questions at this point. The energy cost of capital case is obviously a data point, which could impact how they view our case in some respects, but I believe that's a different judge, and I know that's a different commissioner. So I don't know that, that would stand in the way of this case going forward.
Okay. Yes. And I know all the ins and outs. I was hoping you guys might know because I certainly have a harder time piecing the puzzle together on that.
I think in reference back to Angie's question, I think that the company would really appreciate it if the commission at least issued a proposed decision before we have to release earnings in February of next year so that we just have some guidance on that question about the effective date. I know there's a lot of folks that just assume that, that effective date is back to the start, and we're not convinced of that at this point. So I think we'd like to get that answer on the books, at least in terms of the PD. I think that would be very helpful to us.
And I would really hope there's a PD, but...
Yes, we do too. We do too.
Okay. In terms of the decoupling legislation that was passed, does it specify that the requests must be made as part of like a GRC? Or could it be requested as a stand-alone item, either just by Cal Water by all the utilities together?
Yes. I believe it specifies it's picked up in the next GRC filing, Jonathan.
Greg might have some insight into that.
Greg, you're still on the call, right?
Yes, yes. Actually, it specifies a GRC filing [indiscernible] or by mutual agreement of the company and commissioned by an application between GRCs. So there is an opportunity to file through something before our 2024 GRC.
Okay. And so have you guys, I guess, formulated a strategy based on that? Like, is it wait to see how the Supreme Court case kind of plays out? Or might you do that separate avenue of requesting in between?
Well, I mean...
Go ahead, Greg. I'll let you go first.
I was just going to say what we're going to do, Jonathan, starting in 2023, has put together our case for re-request decoupling that we would either file in our 2024 GRC, which would be July or make the decision based on how things are going with the Supreme Court or other companies if we want to try and file it earlier through an application. But the decision hasn't yet been made actually when we would file it.
And Jonathan, I think the critical element here is that if you recall back to the decision, which wiped out the decoupling there, we didn't have an opportunity to put in any evidentiary testimony and the commission really railroaded us in that case. And so we don't want to go off half cock and file something that doesn't have robust information behind it about how effective the program is and has been. And so that's why we're not likely to go file next week. As Greg said, we're going to spend some time working on our testimony, making sure that we have the facts all lined up before we put that out.
And I think we are keenly interested in the State Supreme Court case. There was a 1% chance they would take the case and they accepted the case. And the case was on the merits of lack of due process. So I think we want to get into that a little bit to see how the State Supreme Court is going to look at it and consider that.
Yes. So what is the, I guess, kind of the time frame on resolution from the Supreme Court now? Is there any statutory time frame? And then two, if they do decide that your due process rights were violated, does that just stricken the order by the commission and you have decoupling like decoupling just is automatically back in? Or what exactly are the impact spring Court rules in your favor?
Well, it's a State Supreme Court. So I don't think they are locked into a schedule per se. I mean, we had to go through an application process that had to be reviewed than they had to accept the case, and then we'll do oral arguments, sometime hopefully in the first quarter. And then I think they tend to move fairly quickly.
The question of what happens next is a good question. I don't think we know because I don't think we've had too many water cases in front of the State Supreme Court. I think we're on a little bit of unchartered ground. I think they could null and void the commission's decision and send it back to them. They could say, this isn't binding, you need to go back and open that particular case to get evidence on the record. I think we're kind of in a new zone here. But again, we're very happy the State Supreme Court took the case on the basis of our argument, which is lack of due process. Yes. I think between the legislative win and the State taking the case, I mean, I feel like we've had good momentum on this issue. And as I mentioned to the governor and the governor's office, it's -- they should perceive it as a bit awkward that a publicly traded company or publicly traded set of companies is calling and saying, hey, cap our upside, which is what decoupling does. But look at the exact environment that we're in, in the state of California with the drought and the climate change issues.
And so it's a little -- and this is my personal opinion, it's a little absurd to think we're getting ready decoupling when we're in this horrible drought. It just doesn't make a lot of sense for the customer. It doesn't make a lot of sense for us, et cetera. So we have stuck by our guns at decoupling because it's the right policy position for us to be in to serve the State of California and our customers within the State.
Right. And obviously, there's been some turnover at the commission since that other order originally handed down. Any sense how the newer commissioners feel about decoupling?
Not yet. I mean when we -- on the slide, we talk about the new paradigm, I think that's what we mean by that. The commission has still been largely remote, still kind of in pandemic mode. So face time has been somewhat limited. And obviously, you have rules around that. Ex parte roles that you can't really talk about an open case with the commissioner. So we're starting to get a little bit more face time with some of the commissioners, which is good. But again, we're prohibited from talking about kind of the current open cases [indiscernible].
[Operator Instructions]. Our next question is a follow-up from the line of Angie Storozynski with Seaport.
Thank you. I'm persistent today. Anyway, so just a couple of other things. So on billed revenues, you mentioned that you think that there's going to be some catch-up before the end of the year. So should I assume that there's a meaningful benefit to fourth quarter earnings associated with those changes in the balance of unbilled revenues?
Let me put it this way. If you look at the fourth quarter of 2021, we had that enormous amount of unbilled revenue that had built up in the second and third quarter and that dropped off to a normal level at the end of the year. And so in this year, we have much less peak unbilled revenue, and that really hit us in the second quarter but we do continue to expect, and we've stated that we expect the unbilled revenue to come back down to a normal level at the end of the year.
So I guess I'm trying to say that we would expect less of a decline in unbilled revenue in the fourth quarter of '22 as compared to the fourth quarter of '21. So I think the answer to your question is yes.
Okay. And then again, not to be [indiscernible] here, but just going back to the P&L. So I asked about nonregulated expenses, but instead, I wanted to ask about the other components of net periodic benefit credit, which is up about $4 million year-to-date, year-over-year. I mean, could you explain to me what this is?
Yes. So we use -- to value our defined pension plan, we use the spot rate method and the use of the spot rate method has resulted in an increase in this credit. So with this is this -- there's the service cost of pension plans and the non-service cost. This is the change to the non-service cost.
And just an important reminder that both the service and the non-service cost of the California pension expense is tracked in a balancing account in California, the bulk of our business, and it doesn't affect net income because there's a revenue offset associated with the balancing account.
[Indiscernible] the smaller part that's out of California.
Okay. And then -- and just concluding on this cost of capital proceeding. So I understand that you are drawing some conclusions from the cost of capital for 2022 for electrics or energy companies. Admittedly, that was just about the cost of capital adjustment mechanism as opposed to a cost of capital review, which is -- which in their case is only for 2023 and beyond. So I'm not quite sure if there is much of a read through here.
And then secondly, you also mentioned that there is some uncertainty about the step-up, the ROE step up on the back of the adjustment mechanism, which by all accounts was triggered for water utilities at the end of September. So especially on the latter, so I understand that you guys have to file for this increase to happen. I haven't seen the filing. So talk to me about how that impacts when exactly this 50 bps step-up would apply.
Sure. So let's go through a couple of things. First of all, as I understand it, and I apologize if I'm incorrect about this, but in the energy capital case, it's not determinative, but it's just sort of an example of what the commission is thinking. There are 2 decisions that are out there. There's the administrative law judge decision and then there's the alternate that's proposed by President Reynolds.
The alternate by President Reynolds says what you said, which is that it just waives the triggering of the mechanism. But the important distinction that I see is that the difference between the 2 proposed decisions is whether they would go back and have a full investigation of the 2022 cost of capital in a full review sense. So that's the open question I was talking about.
And President Reynolds alternate says, we don't go back. And so I thought that was interesting. And it might be somewhat informative into our case. It might not be, obviously, might be a different decision that happens with energy and with water.
So with respect to triggering, the difficulty is that we don't have a proposed decision. And so we cannot make a filing based upon a -- there's no order in a decision that says we file for the adjustment because there's nothing to adjust from and there's no adopted order that says we make that filing. I would expect that if the commission were to come out with a proposed decision and a final decision, let's say, here's your cost of capital for 2022, they would allow us to file for the adjustment for 2023 in that rate order. And so that obviously would not be filed in October or November when it would normally be filed because October, November will have passed by the time the commission issues the decision.
But typically, in cases like that, where they have missed the deadline for a triggered advice letter filing, they'll allow that filing to be made later. And so you walk through a hypothetical and you say, well, if they set cost of capital for 2022, and they do that on January 15 or whatever, there's probably going to be an order in that final decision, which says and the company shall file for the triggered cost of capital for 2023 in the same filing or subsequent to it. So we would see that.
Now keep in mind that a number of the analysts have suggested that the commission might take the information that it might have triggered and just give us a general change to the cost of equity and say that both parties agreed to the adjustment we've essentially waived their hands and incorporate the adjustment into whatever they decide. So that's why we're uncertain. We don't know how the commission is going to react to their own delay.
Well, the only different that the adjustment kicks in -- well, at least theoretically, 1/1/23 and the cost of capital review, i.e., change to the -- well, all components of the cost of capital was 1/1/22, right? So -- but I understand the point that you're trying to make is that there's no certainty as to when exactly it kicks in.
Right. There's no certainty as to how the commission is going to react to the new information about the changed economic environment. That's the gist of it. We just don't know what they're going to say in their decision. And I don't mean to speak over Greg. I know Greg is an expert on this as well. So Greg, if you had any other insights on this, I'd be happy to hear that.
That's how you've addressed all the issues. I would have brought up the same points.
And we have no further questions at this time. I'll turn the conference back over for any closing remarks.
Great. Well, thanks for joining us on this nice fall day. We'll look forward to communicating our year-end results with you at the end of February. In the meantime, be safe, and thank you. Have a good day.
Ladies and gentlemen, that will conclude today's call. Thank you all for joining. You may now disconnect.