SJW Group

NYSE:SJW

Earnings Call Analysis

SJW Group Reports Strong Q2 2024 Financial Performance

SJW Group saw a 12% revenue increase in Q2 2024, reaching $176.2 million, driven by rate hikes and customer growth. Net income rose 13% to $20.7 million, and diluted earnings per share climbed to $0.64 from $0.58. Despite higher operational costs, the company’s infrastructure investments pushed adjusted net income to $21.3 million. Looking ahead, SJW maintains its 2024 earnings guidance of $2.66 to $2.76 per share and a strong 5-year capital investment outlook of $1.6 billion, including significant PFAS remediation investments. The company continues to emphasize stakeholder engagement and sustainable practices.

Sustained Revenue Growth

In Q2 2024, SJW Group reported a robust revenue of $176.2 million, marking a 12% increase from $156.9 million in the same quarter of 2023. This growth was primarily attributed to rate hikes across their local operations, infrastructure recovery mechanisms, and an increase in customer numbers. Year-to-date, the revenue reached $325.6 million, representing an 11% increase from $294.2 million in the prior year.

Strong Net Income Performance

The company achieved a net income of $20.7 million for the quarter, a 13% rise over $18.3 million the previous year. Adjusted figures reflect an even more favorable outcome, with adjusted net income of $21.3 million and diluted earnings per share of $0.66. Year-to-date net income totaled $32.4 million, with diluted earnings per share climbing to $1 from $0.95 in 2023.

Challenges Amidst Growth

Despite the strong financial performance, SJW Group faced challenges that exerted pressure on their margins. Specifically, water production expenses surged by 14% compared to 2023, driven by increased rates from water wholesalers, higher customer usage, and overall growth. The company’s total operating expenses additionally rose by 2%, primarily due to depreciation and administrative costs.

Future Financial Outlook

The company plans to raise approximately $160 million in long-term debt to manage short-term financing, reflecting an average borrowing rate of about 6.53%. This indicates a proactive approach to balancing their financial structure while addressing future capital needs. SJW Group is also anticipating continued revenue increases driven by rate adjustments and customer growth.

Regulatory Developments and Strategic Initiatives

In California, SJW Group successfully reached preliminary agreements with regulatory bodies regarding their general rate case for 2025-2027, with a proposed $103 million revenue increase anticipated over three years. Meanwhile, their investment of $158 million into water and wastewater infrastructure signifies a commitment to long-term reliability and compliance with environmental standards.

Stakeholder Engagement and Community Commitment

The management emphasized the importance of constructive relationships with local stakeholders, highlighting recent successes in customer assistance programs and their engagement strategies. By fostering these partnerships, SJW Group aims to enhance service quality while addressing industry challenges such as PFAS remediation, lead and copper standards, and aging infrastructure.

Earnings Call Transcript 2024-Q2

[Operator]

Good day and thank you for standing by. Welcome to the 2024 Second Quarter SJW Group Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Andrew Walters, Chief Financial Officer, Treasurer, Interim Principal Accounting Officer. Please go ahead.

[Andrew Walters, executive]

Thank you, operator. Welcome to the Second Quarter 2024 Financial Results Conference Call for SJW Group. I will be presenting today with Eric Thornburg, Chair of the Board, President, and Chief Executive Officer. For those who would like to follow along, slides accompanying our remarks are available on our website at sjwgroup.com.

Before we begin today, I would like to remind you that this presentation and related materials posted on our website may contain forward-looking statements. These statements are based on estimates and assumptions made by the company in light of its experience, historical trends, current conditions, and expected future results, as well as other factors that the company believes are appropriate under the circumstances. Many factors could cause the company's actual results and performance to differ materially from those expressed or implied by the forward-looking statements. For a description of some of the factors that could cause actual results to be different from statements in this presentation, we refer you to the financial results press release and our most recent forms 10-K, 10-Q, and 8-K filed with the Securities and Exchange Commission, copies of which may be obtained on our website. All forward-looking statements are made as of today and SJW Group disclaims any duty to update or revise such statements.

You will have an opportunity to ask questions at the end of the presentation. This webcast is being recorded and an archive of the webcast will be available until October 21, 2024. You can access the press release and the webcast at SJW Group's website.

In addition, some of the information discussed today includes the non-GAAP financial measures of adjusted net income and adjusted diluted earnings per share that have not been calculated in accordance with generally accepted accounting principles in the United States or GAAP. These non-GAAP financial measures should be considered as a supplement to the financial information prepared on a GAAP basis rather than an alternative to the respective GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the table in the appendix of our presentation.

I will now turn the call over to Eric.

[Eric Thornburg, executive]

Welcome, everyone, and thank you for joining us. My name is Eric Thornburg, and it is my honor to serve as Chair, President, and CEO of SJW Group. I'm pleased to share that in the second quarter of 2024, we continued to meet drinking water and environmental regulations, deliver on our public health and environmental stewardship commitments, and provide high-quality water and service to customers.

Importantly, we also experienced the benefits of our focused efforts to listen to, learn from, and meaningfully respond to our stakeholders. For example, in California, we reached an agreement in principle on most issues with the Public Advocates Office and WRATES, a local water rate advocacy organization, in our 2025 through 2027 general rate case. We expect the settlement agreement will be filed on or about August the 19th. All but 2 policy issues have been agreed upon, and we are hopeful the CPUC will approve the settlement later this year.

In Connecticut, we worked within the constraints of a formidable regulatory environment to complete our general rate case. Now we didn't get all we expected or, frankly, all that we need from that particular rate case, and there is a lot of room for improvement going forward, which we are already thinking about. But it was clearly a step in the right direction. Our team's responsive filing and constructive engagement with local stakeholders helped facilitate significant improvements between the proposed draft decision and the final decision. I'm proud to share that the Connecticut team's strategic approach, hard work, and transparency was commended by the local regulators, parties to the rate case, and members of the financial industry alike.

And we were able to serve our customers by securing additional financial assistance funds in California and expanding eligibility in Connecticut for our Water Rate Assistance Program, which is a first-of-its-kind program in that state for water utilities. Additionally, across the enterprise, we invested $158 million in water and wastewater utility infrastructure, which constitutes approximately 48% of our $332 million 2024 capital expenditure plan. And we also delivered earnings per diluted share of $0.64 and adjusted non-GAAP earnings per diluted share of $0.66 in the second quarter.

Now, you hear me say every quarter that our people make the difference at SJW Group. This is truer than ever before, and we saw that difference from California to Connecticut this quarter. And as we prepare for the future, we know that constructive relationships with our local stakeholders, built on mutual trust and respect, will be critical.

Our industry has some significant challenges ahead, PFAS remediation, new lead and copper standards, and the replacement of aging infrastructure, just to name a few. And we all know this work needs to get done. There's no question about that. But how we get it done most effectively for our customers and their communities, well, that's the question we need to tackle with our regulators and legislators. And our local teams are ready and committed to investing in these relationships to ensure that we can achieve our shared mission of providing our local community members with reliable, high-quality water and service. Sometimes it's easy to align with local stakeholders on the approach to achieving our common goals, and other times it's a slower process. But we are dedicated to investing the time, effort, and resources needed to advocate and collaborate in service of our customers, their communities, our employees, and shareholders. That's our culture, and it's also a competitive advantage of ours.

With that, I will pass it over to Andrew to review our detailed financial results and regulatory updates in our state operations. Andrew?

[Andrew Walters, executive]

Thank you, Eric. Last evening after the close, we released our second quarter 2024 operating results. In the second quarter, we reported revenue of $176.2 million, a 12% increase over the $156.9 million reported in the same quarter of 2023. The increase was largely driven by rate increases at each of our local operations that included one or more step increases in general rate cases, infrastructure recovery mechanisms, and customer growth. Despite higher water production expenses, we were able to deliver net income for the quarter of $20.7 million, which was a 13% increase over the $18.3 million reported in the second quarter of 2023. Diluted earnings per share was $0.64 compared to $0.58 in 2023.

Second quarter real estate transactions that netted $0.9 million pretax loss have been excluded in non-GAAP results reflected below with adjusted net income of $21.3 million and adjusted diluted earnings per share of $0.66. As you can see, $0.34 of the revenue increase was driven primarily by rate increases in California and Maine and the infrastructure recovery mechanisms in Connecticut, Maine, and Texas. Changes in the allowance for uncollectible customer accounts contributed $0.13 and higher usage and growth added $0.12. The revenue increase was offset by higher water production cost of $0.22 and a $0.09 tax reserve release in the same period last year. $13 million of revenue increase was from rate and infrastructure adjustments and $6 million was attributable to higher usage and regulatory mechanisms.

Water production expense in the quarter increased 14% compared to 2023. The increase was principally driven by rate increases from our water wholesaler in California, higher customer usage and growth. Total other operating expenses increased 2% year over year and was primarily driven by increases in depreciation and higher administration and general cost, which were partially offset by allowances for uncollectible customer accounts. Year-to-date, we reported revenue of $325.6 million, a 11% increase over the $294.2 million reported in the same period of 2023. As we noted for the quarter, the increases were largely driven by rate increases, infrastructure recovery mechanisms, and customer growth. Despite higher water production expenses, net income year-to-date was $32.4 million, a 9% increase. And diluted earnings per share was $1 compared to $0.95 in 2023.

As mentioned earlier, second quarter real estate transactions that netted $0.9 million pretax loss have been excluded in non-GAAP results reflected below with adjusted net income of $33 million. Non-GAAP diluted earnings per share was $1.02 compared to $0.92, 11% increase over 2023. As you can see, $0.60 of the revenue increase was driven primarily by rate increases in California and Maine. Higher usage and customer growth contributed $0.19. The revenue increase was partially offset by higher water production cost of $0.35. Approximately $33 million in gross equity proceeds was raised year-to-date through the at-the-market program.

At the end of the second quarter, we had $217 million drawn on our $350 million bank line of credit, which left $133 million available for short-term financing of utility plant additions and operating activities. During the balance of 2024, we plan to raise approximately $160 million in long-term debt to pay down our line of credit. The average borrowing rate for our line of credit advances during the quarter was approximately 6.53%. The average borrowing rate in the same period of 2023 was approximately 5.96%. The effective consolidated income tax rates for second quarter of 2024 and 2023 were approximately 15% and negative 9%, respectively.

Turning to California, we are pleased to report that San Jose Water has reached an agreement in principle to settle its 2025 through 2027 general rate case with the Public Advocates Office and Water Rate Advocates for Transparency, Equity, and Sustainability, or WRATES. Only 2 policy issues remain, which we expect will be litigated later this year. As required in the procedural ruling, the formal settlement motion and agreement must be submitted to the California Public Utilities Commission no later than August 19, 2024. Until then, we cannot disclose any additional information.

However, as a reminder, the application we filed with the CPUC in January requested a $103 million revenue increase over 3 years and proposed a 3-year $540 million capital expenditure program that would address several key needs, including treating PFAS to meet drinking water standards finalized by the U.S. EPA earlier this year, reducing greenhouse gas emissions through solar generation, energy storage systems to replace diesel generators, fleet electrification, and advanced acoustic leak detection, as well as advancing the CPUC's Environmental and Social Justice Action Plan to improve access to high-quality water service, climate resiliency, and economic and workforce development. A CPUC decision can come as early as the fourth quarter of 2024, and we expect it to be effective on January 1, 2025.

In May, San Jose Water requested a rate base increase of approximately $4.8 million and an annualized revenue increase of $768,000 for investments made to date in our Advanced Metering Infrastructure project. As you may recall, we are planning to invest approximately $27 million in this project in 2024. It is a $100 million project that is separate from the general rate case capital budget, and the majority of the installation is expected between 2024 and 2026.

Turning to Connecticut, on June 28, we received a final decision in Connecticut Water's general rate case. As Eric shared earlier, this case demonstrated the value of meaningfully engaging with our local stakeholders and approaching the filing and hearings with transparency, responsiveness, and a desire for constructive collaboration. We believe our approach resulted in significant improvements between the preliminary and final decisions issued by the Public Utilities Regulatory Authority. The final decision was effective as of July 1, 2024, and provides for an annualized increase of $6.5 million in revenue. It authorized a return on equity of 9.3%, which is up from 9% in our prior case and up from 9.2% in the draft decision. Our capital structure remains near the level authorized in our last case of 53% and our equity at 47% debt.

The decision gave us mixed expense recovery. We sell approximately $3.9 million in unrecovered expenses. However, for the first time, our company has the opportunity to earn additional revenues of $1.1 million in executive compensation for meeting performance metrics set by PURA. As part of the general rate case process, our WICA surcharge, which is an infrastructure recovery mechanism used primarily for the replacement of pipe, was reset to 0.

We had requested $21.4 million, or an 18.1% increase in annual revenue. The final decision granted us approximately 38% of our ask when the opportunity to earn the additional $1.1 million is included and the $1.7 million in depreciation is excluded. It is important to note that none of our infrastructure investment was disallowed, though some projects were excluded because of timing. We expect to recover these investments in future rate cases.

To build on what Eric said earlier, we need more from this final decision, and we are going to continue to need more going forward to address several of the pressing water quality and infrastructure issues facing Connecticut. In approaching our most recent rate case, we went to school on the cases that came before us, and we learned a lot through the process and from our own rate case. We're going to use all of this experience and insight along with continued engagement with regulators and legislators to figure out a way we can move forward together to recover major upcoming expenditures, such as PFAS treatment and the replacement of aging aboveground infrastructure.

We hear from customers that they would prefer a smooth and gradual approach to rate increases driven by essential infrastructure investments, and we would like to work collaboratively with local decision makers to identify the right mechanisms to avoid abrupt and significant rate hikes. However, we acknowledge that a part of the equation is on us to communicate effectively with customers on the need for these investments and the benefits they will provide. We will also continue to find and create opportunities to sustainably reduce operating costs and pass through to customers, such as our company-owned solar generation initiatives that reduce purchase electricity costs or our shared vendor procurement program that leverages our national scale. It will be a combination of all of these efforts that will help us effectively tackle the challenges lying ahead for our industry.

On June 24th, Maine Water filed with the Maine Public Utilities Commission for a water infrastructure charge increase in 2 of its divisions. In Texas, the U.S. Drought Monitor classifies our service area as being in severe to extreme drought and conservation measures are in place as a result of the weather. Because of this, we expect lower water usage in 2024 compared to 2023. However, we are not changing our earnings guidance range due to the situation in Texas, but we are continuing to monitor the drought and its potential impact on guidance.

The KT Water Resources acquisition we made last August will add approximately 6,000 acre-feet of water to our existing water supplies, but it will take time to bring the additional supply online. Additionally, the Public Utility Commission of Texas has approved our request to acquire the 3009 Water system, which serves approximately 270 customers. We expect to close later this year.

Our guidance for 2024: $2.66 to $2.76 per diluted share and $2.68 to $2.78 per diluted share on a non-GAAP basis; equity issuance of $55 million to $65 million, excluding acquisition growth to support a strong capital investment program; we maintain our 5-year capital investment outlook of $1.6 billion, which includes approximately $230 million in investments in PFAS remediation based on finalized maximum contaminant level.

The factors underlying our 2024 guidance include: the return on equity increase in California, which went from 9.31% to 9.81%, net of the 20 basis points reduction for reimplementation of the WCMA was effective January 1st, 2024. The impact of the completed Biddeford-Saco rate case with the 9.5% ROE and 51% equity and 49% debt capital structure was effective January 1st, 2024 as well. Finally, constructive regulatory decisions on current and prospective regulatory filings with Connecticut now behind us that leaves us with California, as well as strategic reinvestments in the business in 2024.

Our 2024 guidance is independent of real estate sales or M&A activities. Further, we reaffirm our stated long-term growth rate of 5% to 7% that is anchored off of our 2022 diluted earnings per share of $2.43, which is nonlinear because of rate case cycles.

With that, I will turn the call over to Eric.

[Eric Thornburg, executive]

Thank you, Andrew. One of the ways we measure our impact and success as a company is how have we been a force for good. One area where we have achieved exciting outcomes is in expanding access and financial support for our customers. Over the past 2 years, San Jose Water has secured $15.3 million in arrearage relief for its customers from the California Water and Wastewater Arrearage Payment Program. The most recent installment of $9.1 million was received this past May and will help support customers who experienced financial hardship due to COVID. At Connecticut Water, PURA approved our request to expand income eligibility for the Water Rate Assistance Program, or WRAP, a first-of-its-kind program in the state that offers water bill discounts for income-eligible customers. The company looks forward to expanding the program to more customers and providing deeper discounts to those customers who need it most.

Just a little history on WRAP. We first introduced the program in Connecticut in our last general rate case based on the good work San Jose Water was doing in California, assisting customers in need. As you can see, it has since expanded and evolved at Connecticut Water to support more customers more meaningfully. Importantly, it has also inspired similar programs by regional peers, amplifying the impact of our Force for Good initiatives beyond our own service areas.

Over the last several years, we've built a strong national platform to support our growing local operations through the good times and the inevitable headwinds. And with a lot of effort and intention, we have maintained our fundamental values and culture through this growth. And that culture continues to guide us and distinguish us as we make business decisions that build trust with stakeholders. I continue to be inspired by the contributions of our talented teams across our local operations as they consistently provide an essential service with integrity, reliability, genuine care, and transparency. I'm confident in our team's commitment to serving customers, communities, and the environment will continue to excel SJW Group's ability to deliver value to our stakeholders and reinforce our strong position for a successful future.

With that, I'll turn the call back over to the operator.

[Operator]

[Operator Instructions] Our first question comes from the line of Richard Sunderland of J.P. Morgan.

[Richard Sunderland, analyst]

Can you hear me?

[Eric Thornburg, executive]

Yes, we can, Richard.

[Richard Sunderland, analyst]

I wanted to touch maybe first on the Texas drought. I know you mentioned the drought risk a little bit, but could you quantify some of that risk both to 2024 guidance overall on an EPS basis, as well as just what the year-to-date impacts you've seen and results are as well?

[Andrew Walters, executive]

It's a great question, Rich. I think they have just gone to the next stage of drought. And at this stage, I don't have an exact quantification of where that's going to be until we see where the usage settles out at. I would say that under the base case scenario, we have taken this into account. It's just if it becomes more biting than what we expect as a base case scenario that we will have to come revisit that at that point.

[Richard Sunderland, analyst]

Okay, understood. Very clear. And then turning to Connecticut, how does the Connecticut order compare to your long-term plan assumptions embedded in the 5% to 7% EPS growth rate?

[Andrew Walters, executive]

That's an excellent question. Look, it's definitely not additive to the growth rates that we have, but it is well within the range of where we expected at this point or could expect on a potential range of outcomes. So, while it might itself be dilutive, we are seeing other parts of the business that are overcoming any of the issues with that as it stands today.

[Richard Sunderland, analyst]

Got it, understood. Then one final one on Connecticut. I know you had a lot of commentary around engagement in the process, but also balance that against the reality of the outcome and the order itself. Thinking about the state at a high level and given all the public attention on Aquarion, does the rate case outcome impact any thinking or interest around that asset?

[Eric Thornburg, executive]

I think that stands on its own, but, of course, the regulatory climate, Richard, is a key factor of that. Certainly, as I mentioned, a good step forward here. I was also heartened with some of the regulatory decisions just announced for Eversource and United Illuminating involving their EV charging deployment work. There were some proposed decisions announced, which is just encouraging to see that getting back on track.

And so we are optimistic, and we will continue to lean in and educate and build trust with regulators. And I might also mention, this morning there was an announcement, Governor Lamont announced that a new Commissioner was going to be appointed in January. His name is David Arconti. He is a former state representative, and he is currently the Vice President of Government Affairs for United Illuminating. Governor Lamont also announced the retirement in January of Jack Betkoski. And Jack has served for 27 years at PURA. So some very recent regulatory developments there, and we would like to think that former State Rep. Arconti's service at United Illuminating would also provide some additional perspectives that could be valuable down the road as he serves as a regulator in Connecticut.

[Operator]

Our next question comes from the line of Michael Gaugler of Janney.

[Michael Gaugler, analyst]

Congrats on the quarter. I'd like to start on the Connecticut operations, with you coming just out of the rate case. Do you expect the rate case cycle to condense going forward, given the outcome?

[Andrew Walters, executive]

Look, I think, Michael, that's definitely a potential mechanism that we will utilize as we think about this. And what we will do is we'll continue to monitor where we stand from a recovery standpoint and make the best decisions to go in when that fits with where we're seeing our recovery at. The other thing to keep in mind that we've talked about in the past is we do want to also continue to distribute our rate cases so that we don't have any crowding of rate cases where California is going in at the same time as Connecticut, so we have our larger divisions going in at different times. So, that'll be a second factor. But you can absolutely expect that we will be paying attention to the timing of our next rate case.

[Michael Gaugler, analyst]

Okay. And then over in the California rate case, given the settlement agreement, just wondering how confident are you that you could get a decision by year end?

[Eric Thornburg, executive]

Yes, Michael, I'd be highly confident that we can. We achieved an all-party settlement, which makes that all the more likely. And the remaining items are 2 small policy matters that we'll just brief, and the Commission can then decide. So, I think all parties are highly confident in this case that we'll be approved and ready to introduce new rates on January 1st, 2025.

[Michael Gaugler, analyst]

Great. Then just one more on Texas. You mentioned the drought, and Richard had some questions on it as well. Just wondering what your supplies through the remainder of the year look like.

[Eric Thornburg, executive]

Canyon Lake is a significant portion of our source of supply, and that lake is down to 55% of its normal capacity, or full capacity I should say. And so, that's a pretty significant variance from what you would normally expect to see in the summer. We also have significant groundwater supplies that we use. But because of the condition of the lake, we introduced the Stage 4 drought declaration. And what that requires is customers, in certain counties, cannot use water for irrigation. So, that's a pretty significant request of our customers. But at the same time, I would put it in perspective, Texas is 5 percent of our overall business, and our team there will work very hard to offset the earnings implications for that particular business. So, as Andrew said, with our guidance affirmation today, we still feel like we're on track there, but we'll watch it very carefully.

[Andrew Walters, executive]

Yes. The one thing, too, to add to what Eric just talked about, coming into this quarter, we were already down to 1 watering day every 2 weeks for our major areas. And so, on one hand, you can say that it's not that big of a move, but when you have no watering, there's no forgetting which day you're supposed to water in this case, and so I think that's going to be the part that we'll have to take a look at as what the ultimate impact is.

[Operator]

Our next question comes from the line of Jonathan Reeder of Wells Fargo Securities.

[Jonathan Reeder, analyst]

So, I first wanted to start on the A&G expenses. They decreased $3.1 million during the quarter. Was that expected when guidance was first initiated, or are there some timing issues or things that might reverse during the rest of 2024? Like, for instance, did that receipt of the $9.1 million in arrearage release in California during May, did that help drive that lower allowance for uncollectible accounts in the quarter?

[Andrew Walters, executive]

Yes. So, Jonathan, it did, and the more important part is the ability, when we applied for that program, we were not in a position at that point to start shutting off customers that were part of that program, because that was a condition. So, given the ability for us to start shutting off customers who are not paying their bills, that drives the release as well. And the other component to keep in mind, while we knew that we were going to get this during the year at some point, what we didn't have guarantees amounts or the total amount that was going to happen, we had an expectation. And the other piece is we certainly didn't know the timing, so which quarter it would come in.

So, yes, it was part of our standard operations, and it's why it's not highlighted differently. But it is something that we will continue to watch, because we do have an expectation that our customers will pick up their payments to us, and we have seen that already on people that were not part of the program that we started doing shuts on, we saw a very positive response to those folks paying their bills, and now it's for these remaining items.

The other thing I will just highlight is with the arrearage program, it cleared out any balances of people that were prior to 2022, so the balances are, generally speaking, fairly fresh at 2023/into this year.

[Jonathan Reeder, analyst]

Okay. And then, I guess, can you also remind us whether Q3 '23 or Q4 '23, if the results included any significant benefits that won't be occurring in the second half of 2024? Just seems that otherwise, I guess, Q2's favorable revenue drivers like the California rate increases and now the Connecticut rate case order would have the full year '24 results trending at or above the high end of the guidance range. Obviously, there's Texas to keep in mind, but I guess if you just say it a little differently, if the second half '24 EPS are just flat compared to second half of '23, it puts you just above the midpoint of your guidance range.

[Andrew Walters, executive]

Right. So, I think it's a very fair way to look at it. As I think about the items that were there that I remember off the top of my head, most of the one-time items that would have impacted like the real estate happened in the beginning of last year, in the first 6 months, and so that would not be a repeat.

Outside of that, I can't think of something that was a very unique item. The one thing when I make comments like that, Jonathan, there are always pluses and minuses all over the place. And that's what we do is just managing all those pluses and minuses. But for something that significant, I don't have something off the top of my head.

[Jonathan Reeder, analyst]

Okay. Yes, no it just seems like I think it was Eric who made the point, Texas is only 5%. Obviously, there's the unknowns around the revenue impact there. But overall, it seems like based on the first half of the year, you're in a pretty strong position with regards to your guidance range and maybe being in the upper half or above prior to potentially some of those puts and takes.

[Andrew Walters, executive]

Yes. Let me just be clear that we're not seeing us being above the guidance range at this time. So, I don't want you to feel that confident. But I do say that we've had a positive performance year to date. But, as we highlighted in the press release, there has been inflationary impacts that impacted the business. So, you do have to keep that in mind when you're thinking about the impacts. So, there are positives that we're seeing in there, but there are some negatives that we're having to manage through as well.

[Jonathan Reeder, analyst]

Sure. Okay. Shifting gears a little bit. How do you think about the California Supreme Court's recent ruling on decoupling, and how does that impact the prospects of decoupling getting restored for water utilities by the CPUC?

[Eric Thornburg, executive]

You know what, Jonathan? A great development. Really pleased the collaboration across the industry to go about getting the legislation that made clear to the California PUC that this was a very viable regulatory tool. And now further with the Supreme Court ruling on the prior cases for some of our peers, I think it all bodes well. But the Public Advocate's Office has strong views in opposition to using decoupling. So, there's still work to be done from that standpoint. And we're going to watch carefully our peers, see how they do in their cases, and then our next cycle around, we'll take a very hard look at it. I'm in favor of using them.

And as you know, because we didn't think we had that option, we've worked very hard on the fixed charge component and recovering more and more of our fixed costs through our service charge, which we've achieved that. But we do like the decoupling. We'll watch it carefully. And hopefully, we continue to track and trend towards the reintroduction of that tool. And again, just one final comment, of course, we have a form of decoupling in place with ourselves, with our WCMA that we're benefiting from currently.

[Jonathan Reeder, analyst]

Yes. No, you guys are already in a position of strength relative to some of the others in there. But last for me, can you provide the latest thoughts on the potential Aquarion opportunity, including the timing of when the sale process might be conducted as you understand it?

[Eric Thornburg, executive]

It's a difficult one, just because as you would guess, there's confidentiality agreements and the like for events such as that. But we're very excited about the potential opportunity there, Jonathan. We're very familiar with the assets, and we think it would be a great combination with our company. And we look forward to the process ahead here.

[Operator]

Our next question comes from the line of Angie Storozynski of Seaport.

[Agnieszka Storozynski, analyst]

So, I have somewhat of a weird question. I'm just bracing for rising electric prices, electricity prices overall. And I'm just wondering just 2 things: one just talk to us about your recovery methodology for rising electricity capacity prices, you name it. Is there a way for you to either maybe lock in rates ahead of time or just try to mitigate that impact?

And then #2, mostly, how do you think in this rising electricity price environment you, as a water utility, will be treated by regulators and potentially investors? Do you actually think that you will regain your competitive advantage given that water bill affordability will be probably meaningfully improved than that versus electric bills? So, again, just this whole issue of likely rising electric bills that we are currently forgetting about.

[Andrew Walters, executive]

Yes. Look, it's an excellent point to bring up, Angie. And it's something that we do not overlook on the impact on our customers. In California, we have a balancing account that allows us to put that through. So, California is not something that we would see an impact directly on us. But we do have impacts on our customers. So, we have been out there continuing to convert facilities over to solar, which fixes the charge for that electricity over a longer period of time and does also allow for the benefit of providing a greener source of electricity for the communities that it's based in.

The second aspect as we think about our Connecticut and Maine businesses, we tend to contract for that power. And so we buy the power in advance. We have seen an increase in those rates, to be clear, even for the contracted rates over where we were before, because of last time when we purchased power, they were significantly lower than they are today. That being said, those increases, at least some of them, have already reflected in the current rate case that we have seen with more to come. It's something that we will have to manage as we look at that.

For your third item, though, of affordability, there is a tremendous value, from my perspective, in water relative to some of the other commodities that other utilities are responsible for delivering. And if we look at our affordability relative to the metrics that are out there and our overall bills, and just to remind you of that page that we have in the back of our investor deck that highlights what our cost is to customers as an average bill relative to their median household income, we are below 1% in all of our jurisdictions, which is a very solid place to be.

The other thing that we are continuing to do, Angie, is we are never done trying to save money for our customers. And we are continuing to come up with new ways and new programs in order to save money for our customers, with solar being a great example. We actually put that in, and it earns for our shareholders, but it reduces costs for our customers. And what an outstanding outcome for that.

[Eric Thornburg, executive]

Some really good points. I love the question. By the end of this year, we will be generating 6,200 megawatts of solar power for our companies. And I was delighted when I saw our Sustainability Report in Texas. 100% of our electricity comes from renewables, and Connecticut is 70%, and then California and Maine is 50% and rising. So, we've been tapping into that market as well and really trying to be a Force for Good there.

[Agnieszka Storozynski, analyst]

And then the other question about maybe just in general, like M&A transactions. So, you clearly should have some economies of scale benefits for Aquarion, but also any other utility in the same state where you currently operate. Is there a rule of thumb, for example, as far as O&M savings or SG&A savings or any operational benefits of basically enlarging your operations in the state in which you currently operate? Again, I can quote those, for example, for power. And I'm just wondering if the same is true on the water side.

[Andrew Walters, executive]

I guess, Angie, I would say from my understanding what power numbers are for what I expect, and I remember numbers of 10% approximately of nonfuel O&M savings, those are consistent with where water utilities can expect to potentially have savings. It changes from opportunity to opportunity. So, you have to be careful with rules of thumb like that, because there are places where you can do better, and there's times when you can't do as well. And so I think that's something that has to be paid attention to. That being said, if there were to happen to be a contiguous consolidation, you tend to have good performance in those contiguous consolidations.

[Operator]

Our next question comes from Roger Liddell of Clear Harbor Asset Management.

[Donald Roger Liddell, analyst]

I take it you can hear me?

[Eric Thornburg, executive]

Yes, we can.

[Donald Roger Liddell, analyst]

A couple of questions dealing with Connecticut. The $3.9 million of unrecovered expenses, I take it those are separate and distinct from uncollectibles. Is that true?

[Andrew Walters, executive]

That is true, Roger.

[Donald Roger Liddell, analyst]

Yes. Okay. The recent rate increase in Connecticut that you referred to incorporated a make whole for Eversource and United on unpaid bills, all of the, call it the baggage from the pandemic period. So, the combined public benefit charge went up about 130% that component of the monthly bill. So, that looked to be clearing the decks for Eversource and also on the unrecovered millstone purchase power, keeping millstone in operation. They have been made whole up through July 1. So, there appeared to be sensitivity at PURA for at least those issues. And on hanging you with a $3.9 million of unrecovered, can you talk to us just even briefly on why they did that and how you are dealing with it?

[Andrew Walters, executive]

So there were a few different factors that impacted the decision. So, there was, just to take one component of it offline, there was Senate Bill 7 that had some expenses that were removed because of what Senate Bill 7 said. That was less than a million dollars of that total number that was there. So, while it was there, it was not as significant as some of the other key items. I'll give you another example of, and this is not to be like all-inclusive, but they reduced the audit fees that were being charged, the internal audit fees, external audit fees, and said that that was really a shareholder benefit. We obviously very much disagree with that because the fact the audit requirements have nothing to do with equity shareholders. It's 100% to do with the debt providers that provide debt to those entities.

And so, that's something that we hope to continue to work to communicate the reasons why those expenses are in place. But it does give us a fresh opportunity, Roger. Like always when you have a challenge like this, how can we address the situation and reduce our costs? And so those are the things that we're looking at is how can we reduce those audit expenses that are going into the next 3 years [ plus ].

[Donald Roger Liddell, analyst]

Okay. And on the performance metrics for management. Are they in the public domain? And is there any reason to discuss them here?

[Andrew Walters, executive]

Sure. Look, they are in the public domain. It's part of the decision. And it's largely around the metrics associated with our customers and how we -- affordability. And so I think from that perspective, we feel very good about our ability to affect our operations in a way to meet those performance metrics. And I think that's important to note that performance metrics by themselves, some people get nervous about them. But I think as long as they're properly set in a way that you can have a pathway to get there, and they can affect what they're trying to affect, and we can get to those numbers, it can be a very effective way to increase the efficiency of utilities as well as increase specific objectives that PURA is after as well.

[Eric Thornburg, executive]

Yes. The plus side, of course, it was the first time we'll be able to have the opportunity to recover components of executive comp at the long-term incentive level. And in the past, we've not been eligible to recover that. So, that was a win, as Andrew said.

[Donald Roger Liddell, analyst]

Next question is on the advanced metering infrastructure program. Big bucks and I take it, significant reward for all stakeholders from it. But the term advanced metering infrastructure means so many different things, whether it's electric or gas or water. And in many cases, AMI is effectively just a way of keeping the meter reader from getting bitten by the dog. But the leak detection, I take it, replacement of mechanical meters with ultrasonic-based ones and leak detection, the ability to have notifications to even [ resi ] customers on a potential leak. Is that all part of the package?

[Eric Thornburg, executive]

Roger, that's exactly right. We're not installing the drive-by meter reading system. This will all be automated. We're installing antennas around our service area. So, it will be picked up through those signals. So, that will eliminate all these truck runs and manual intervention. Customers will have a portal that they can track their daily water use. They will get alerts if they have continuous usage for 24 hours indicating a leak. And so, all those benefits that we've long been excited about are going to be available to our customers here in the next couple of years. So, we're just starting the implementation now. It's exciting. And we're really, really pleased to get this opportunity, the first of its kind in California for major water utilities.

[Andrew Walters, executive]

And I'm just going to add to Eric. I'm glad you brought up that it was the first of a kind because I think that's something that really highlights the unique area that we're in. Our customer base actually is requesting that they have this access to this type of technology. It fits very well with the Silicon Valley area that we are based in and the high-tech focus. So, that part is great. But the part that I find particularly satisfying is the ability for us to help save customers money with that leak detection that Eric just talked about. That was a major component.

There were many others in terms of the savings, but the savings for the customer side on leaks that they were paying for is significant. And when you have a valuable water resource that is in California that has different levels of availability, you don't want to waste water. You want to make sure that it's being delivered to its ultimate intended use.

[Donald Roger Liddell, analyst]

As I recall the figure, my figure may be stale. I hope you can update me. But unaccounted-for water system-wide across the country was in the range of 30%. I'm hoping that figure is a lot lower. But everything you're speaking of is at the customer end, as I think you have described it. And I get those benefits. But how about you managing the system and everything from the production plant to those advanced meters? Are you also instrumenting your systems and able to get the same kind of leak detection that way? And what percentage do you have at the current time for leakage from, and I suppose any wastewater applications it's leakage into?

[Eric Thornburg, executive]

Yes. Thank you for the question, Roger. In California, we deployed over 10,000 devices that are built into the steamer nozzle of fire hydrants. And at night, these are activated, and they listen to the pipe. And through various technology, we're able to determine, well, is it a leak or is it water usage in a home, or what have you. So we're able to go out and find leaks before they surface as a result of these listening devices that are incorporated into the hydrant caps.

And we've deployed those throughout California and in Connecticut. And they're just a fantastic way to preemptively fix small leaks before they devolve into a major leak and blow up the street, et cetera. So, we are in the 7% unaccounted-for range in California. We think it's world class, but we think we can do even better. And in the other states, we're more in that 15% range. Unfortunately, the national average still is in that 25% to 30% range. And that goes to our hesitancy across the nation to replace the old pipe. We're committed to 1% replacement a year. That's industry leading. But gee whiz, that's still saying 100 years. And so, we'd like to see the rest of the industry adopt that 1% replacement rate at a minimum so we can reduce water loss through leakage.

[Andrew Walters, executive]

Eric, I may just add just one thing to that, too. The system you just talked about uses artificial intelligence to listen to those signatures. And we also use artificial intelligence on picking pipes just as part of our regular program here in California, which pipe is the right pipe to pick, so that it not only looks at the failure, but also the impact of failure, which I think is another industry leading aspect of the utility.

[Operator]

I'm showing no further questions at this time. I'll now like to turn it back to Eric Thornburg for closing remarks.

[Eric Thornburg, executive]

Thank you, everyone, for joining us today. We're halfway through the year. We've got a lot more to look forward to into 2024, including a decision on our California rate case, implementation of our AMI initiative in California, progress with bringing greater water supply online in Texas, and advancing our PFAS remediation strategy.

SJW Group proudly leverages our national platform to support our distinct local operations and our shared mission to reliably serve high-quality water to 1.5 million people across 4 states. And while we do this, we make sure we execute on our growth strategy and deliver shareholder value, including paying a dividend, which we have faithfully done for 80 straight years. And we've raised that dividend for 56 consecutive years. I recognize that it's our culture of service to our customers and to local communities that underlies our success. And I'm very proud of our people who make it all possible.

Thanks again for your time today and your questions. We look forward to sharing our progress with you next quarter. And in the meantime, Andrew and I, along with the rest of the SJW Group team, are always available for follow up. Thank you again for your interest in SJW Group.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.