SJW Group

NYSE:SJW

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the SJW Group Q4 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advise that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr. Jim Lynch, CFO and Treasurer. Thank you. Please go ahead, sir.

[Jim Lynch, Chief Financial Officer]

Thank you, operator. Welcome to the fourth quarter 2020 financial results conference call for SJW Group. I will be presenting today with Eric Thornburg, Chairman 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 www.sjwgroup.com.

Before we begin today's presentation, I would like to remind you that this presentation and the 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 developments 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, I refer you to the financial results press release and to 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. As a reminder, this webcast is being recorded and an archive of the webcast will be available until April 26, 2021. You can access the press release and the webcast at our corporate website.

I will now turn the call over to Eric Thornburg.

[Eric Thornburg, President & Chief Executive Officer]

Thank you, Jim. Welcome, everyone, and thank you for joining us. As we reflect on 2020, I'd like to begin by recognizing our nation's essential workers who are bravely serving us on the front lines during this extraordinary time. From the public safety employees consisting of police, fire, emergency response, and health care professionals to our grocery store and other critical supply chain workers, they all deserve our recognition and appreciation for their dedicated service.

Our appreciation and recognition also extends to our 700-plus employees and their utility industry peers across the nation, who we consider to be essential as they continue to deliver safe and reliable service. Our dedicated and passionate water professionals met the challenges of 2020 head on to provide a reliable supply of safe drinking water to more than 1.6 million people in our local service communities in California, Connecticut, Texas and Maine.

In my 38 years in this profession, it never mattered more. So while COVID-19 dominated 2020, it did not dominate our people. I'm especially proud of our teams and their commitment to protect the health of their customers, communities and coworkers. They knew that delivering safe, clean drinking water to their customers and communities was essential to public health.

They developed protocols and procedures that protected their coworkers so they can safely carry out their essential work. And they did it by collaborating across our expanded national footprint to support each other and build on our strengths for the good of the entire organization. And it also reminded us that human life is precious and fragile and that there is no higher calling than to serve others.

We also responded to the needs of customers and communities who were financially impacted by COVID-19. Since the beginning of the pandemic, we've worked with customers throughout -- through our assistance programs to help them keep their accounts current and suspended shut offs for non-payment, consistent with each state's requirements.

And we increased our donations to local service organizations in 2020 to help them meet the basic needs of people in the community. It is clear that our transformative combination with Connecticut Water Service, Inc. in 2019 made for a stronger SJW Group in 2020, which benefited shareholders, customers and employees.

Our 2020 Corporate sustainability report, coast to coast, documents our commitment to environmental, social and governance matters. As that report was telling our story, the Company was recognized with prime status by ISS ESG. Prime status is awarded to companies with an ESG performance above the sector-specific prime threshold where we were tied for the top ranking among U.S. utilities.

We saw significant improvements in our environmental and social scores and ranked second among our utility industry peers for our combined environmental and social quality scores. Our governance quality score was already at the highest level and placed us among the top within our industry.

We're especially proud of the human rights policy adopted by our Board in the fourth quarter. The policy affirms our conviction, the human rights are fundamental rights, freedoms and standards of treatment to which all people are entitled. It also reflects our values and commitment to diversity, equity and inclusion.

A team of employees with the full support of senior leaders and the Board serve on our national diversity, equity and inclusion council, DEI, to support and advocate for DEI initiatives. We, as a company, are committed to fostering an environment where employees can bring their true-selves and feel included, welcomed and valued. We're also determined to be a force for good in the communities where we live, work and serve.

For example, in 2020, San Jose Water was responsible for $28.8 million of diverse supplier spend, representing 30.1% of our addressable spend there. And following Connecticut Water's adoption of a supplier diversity plan in early 2020, both Texas and Maine approved formal plans later in the year that are being implemented in 2021. We are fully committed to our diverse supplier program, and we'll continue to share our progress in the years to come.

Other highlights of 2020 include investing more than $199 million in our water and wastewater systems across our multistate footprint, achieving world-class customer satisfaction on a composite basis across the Company and another successful year of meeting drinking water and environmental regulations, delivering on our commitment to public health and environmental stewardship.

I will now turn the call over to Jim, who will review our financial results. After Jim's remarks, I will address regulatory, water supply and other business matters. Jim?

[Jim Lynch, Chief Financial Officer]

Thank you, Eric. Our 2020 operating results reflect our first full year of combined activity with CTWS. One key attribute of our merger was the diversification we achieved by expanding our geographic footprint into New England.

The strength and importance of our diversification strategy were tested almost immediately by the drier than normal winter we experienced in our Northern California service area, severe weather events in our Texas and New England service areas and COVID-19 and its impact on our customers, operations and construction activities across the United States.

In each case, the impacts of these events on SJW Group's combined operating results were diminished due to our geographic diversification in the case of weather events, and diversification of our regulatory and operating platforms in the case of COVID-19.

Diversification, coupled with our strong local operations, supported by our national framework enabled us to safely deliver water service to our customers and communities, protect our employees and deliver solid results for our shareholders.

Fourth quarter revenue was $135.7 million, a $9.9 million increase over reported fourth quarter 2019 revenue. Net income for the quarter was $13.3 million or $0.46 per diluted share. This compares with a net loss of $5.5 million or $0.19 per diluted share for the fourth quarter of 2019.

Diluted earnings per share for the quarter reflects lower CTWS merger expenses of $0.36 per share, higher customer usage of $0.22 per share and lower administrative and general expenses of $0.19 per share due to lower integration costs.

These increases were partially offset by an increase in production costs due to higher usage of $0.10 per share and a decrease of $0.05 per share due to lower local surface water availability in Northern California.

Turning to our comparative analysis for the quarter, our $9.9 million revenue increase was primarily due to increased customer usage of $6 million and $1.4 million in cumulative rate increases. In addition, we recorded $2.8 million in customer rate credits in the fourth quarter of 2019 as a result of regulatory commitments we made in connection with the merger.

No such rate credits reoccurred in 2020. Water production expenses increased $3.6 million compared to the fourth quarter of 2019. The increase included $2.6 million in higher customer usage and $1.5 million for the purchase of additional water supply necessary to supplement California surface water.

Other operating expenses decreased $12 million during the quarter, primarily due to lower merger-related expenses of $9.7 million and lower general and administrative expenses of $5.1 million due to lower merger-related integration costs. These decreases were partially offset by $2.5 million in higher depreciation expense.

The effective income tax rate for the fourth quarter was a negative 7% compared to 6% for the fourth quarter of 2019. The effective tax rate decrease was primarily due to the capitalization of non-deductible merger expenses, which resulted in a decrease of tax benefits in 2019. No similar tax benefit reduction occurred in 2020.

Turning to our annual results, 2020 revenue was $564.5 million, a 34% increase over the same period last year. Net income in 2020 was $61.5 million or $2.14 per diluted share compared to $23.4 million or $0.82 per diluted share during the same period in 2019. The change in diluted earnings per share for the year was due to many of the same factors noted for the quarter.

CTWS customer usage contributed $2.83 per share and customer usage from our other operations increased $0.59 per share. Due to the timing of when the merger transaction closed in 2019, we only recorded $0.01 per share of earnings from CTWS in 2019. As such, essentially all of CTWS 2020 customer usage is reflected as an increase as compared to the prior year.

In addition, 2019 non-recurring merger costs contributed $0.48 per share and the WCMA write-off in 2019 contributed $0.29 per share. These increases were partially offset by increased production costs of $1.04 per share due to higher usage, a net increase in interest on long-term debt of $0.86 per share due primarily to merger-related debt, and 2020 note issuances and a decrease in local surface water availability in Northern California of $0.58 per share.

Our 2020 increase in revenue was primarily due to $111.2 million in increased customer usage, $12.2 million in cumulative rate increases and $2.7 million from new customers. These increases were primarily the result of the addition of CTWS and higher usage due primarily to drier weather in our service areas.

Water production expenses increased $50 million in 2020. The increase was primarily due to $33.9 million in higher customer water usage from the addition of CTWS and drier weather, and a $19 million increase due to lower surface water supplies. This increase was partially offset by $3.4 million of increase in California cost recovery balancing and memorandum accountants.

Other operating expenses increased $33.9 million in 2020, primarily due to a $23.7 million increase in depreciation expense, $13.4 million in higher general and administrative expenses and $10.8 million in higher property and other non-income taxes. The increases were primarily a result of the inclusion of CTWS operating activities. In addition, in 2019, we incurred $15.8 million in merger expenses related to the merger transaction.

No similar expenses were incurred in 2020. Other income and expense for the year included $13 million of new interest on SJW Group's $510 million senior notes, which were issued in October of 2019 and a $50 million senior note issued by SJW Group in August of 2020, as well as $8 million of interest expense on CTWS financings.

Other expense and income in 2019 included $6.5 million of interest income earned on the proceeds of the Company's December 2018 equity offering. No similar income was earned in 2020.

Turning to our capital expenditure program, we added approximately $65 million in company-funded utility plant in the fourth quarter of 2020, bringing total company-funded additions to $199.3 million. Our 2020 cash flows from operations decreased approximately $25.9 million over the same period in 2019.

The decrease was primarily due to the authorized collection of $45.3 million of balancing and memorandum accounts in 2019, a decrease in collections of previously billed and accrued receivables of $15 million, a decrease in other non-current assets and liabilities of $12.4 million and a $50 million upfront payment we made to the city of Cupertino in connection with our service concession agreement.

These decreases were partially offset by a $51.8 million increase in net income adjusted for non-cash items. We continue to monitor customer payment activity at each of our four operating utilities.

And specifically, the impact COVID-19 is having on our customers' ability to remain current with their accounts. In our Northern California service area, where we have seen the largest increase in past due accounts, the California Public Utilities Commission has authorized water utilities to activate their catastrophic emergency memorandum account or their SEMA.

The account track savings and costs from COVID-19 related activities as well as uncollectible account balances beyond the authorized bad debt in our most recent general rate case. SJWC has determined that future recovery of the account is probable and recognized a regulatory asset of $2.3 million in the CMO-related to COVID-19 for the year ended December 31, 2020.

At the end of 2020, we had $84.9 million available on our bank lines of credit for short-term financing of utility plant additions and operating activities. The average borrowing rate on line of credit advances during 2020 was approximately 1.78%.

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

[Eric Thornburg, President & Chief Executive Officer]

Thank you, Jim. SJW Group continues to deliver on our core growth strategy of investing in high-quality water systems to provide safe and reliable water service to customers and communities and earning a fair return on those investments.

In the last decade alone, more than $1 billion has been invested in the local water systems of the communities that we serve. It's well documented that our nation's water and wastewater systems are in need of significant investments. Utility regulators have historically recognized this need and have enabled regulated water utilities to make such investments.

In 2021, SJW Group's subsidiaries plan to invest $239 million in infrastructure improvements to serve our customers in California, Connecticut, Maine and Texas. Over $1 billion is planned across the organization over the next five years.

Accordingly, in January, both San Jose Water and Connecticut Water filed general rate cases. San Jose Water's GRC application proposes a $435 million capital program for the years 2021 through 2023, supported by our award-winning enterprise asset management plan.

The process is expected to take about 12 months, and new rates are anticipated in January 2022. California employs a future test year, and thus, the level of capital spend is authorized during each general rate case cycle.

Connecticut and Maine employ a historical test year where capital investments and expenses are recovered after they have been incurred and subsequent general rate case filings. Connecticut Water's GRC is the first it has filed since 2010.

A primary driver of the case is the $266 million in infrastructure investments that have been completed and are providing a benefit to customers but are not yet covered in rates. The Connecticut Public Utilities regulatory authority, PURA is expected to issue a decision in Q3.

Earlier this year, PURA approved a 1.1% increase in infrastructure surcharges through the water infrastructure and conservation adjustment program, or WICA, this request covers $8.7 million in qualified infrastructure investments with incremental annual revenue of about $1 million. It will become effective on April 1, 2021.

Maine Water received approval in December 2020 for infrastructure surcharge increases in five divisions for eligible projects through the water infrastructure surcharge program, or WISC. The increases were effective on January 1, recognizing $3.5 million in critical infrastructure investments and increasing revenues by about $300,000.

These various filings include proposed capital investments that, over the long term, benefit customers, communities and shareholders as they enhance SJW's ability to deliver safe, high quality, and reliable water service while increasing rate base, the earnings engine for the Company.

In January 2021, San Jose Water, along with the three other Class A water utilities, requested a one-year deferment on their cost of capital filings, which would otherwise be due on May 1 this year.

Postponing the filing for one more year would alleviate administrative processing costs on the utilities as well as the commission staff and provide relief for both commission and utility resources, already strained by numerous other proceedings and COVID-19. We will let you know if the commission approves this request.

Turning to water supplies in California, we are seeing less precipitation than normal, both locally as well as in the Sierra Nevada Snow Pack, California's largest reservoir. Thanks to the work of Valley Water, our wholesale water provider, we do not anticipate any short-term supply shortfalls as our groundwater basin remains full and can be leveraged as needed to ensure that we can meet customer demands during the upcoming year.

The rainy season typically ends in late March, and we will have a complete picture of our supply status when we report Q1 earnings. At that time, we also plan to issue 2021 guidance. I'd also like to comment on the very difficult situation in Texas.

The combination of what has been described as a once in a century cold spell, coupled with an ice storm, a snowstorm, and rolling blackouts across the state has resulted in a real crisis affecting millions of people.

Our operation located in the fast-growing region in between Austin and San Antonio, serves 20,000 customer connections. Like our utility peers, we've suffered significant operating challenges during the crisis, owing to energy disruptions, broken water mains and roads that have remained nearly impossible since Sunday.

We are focused on restoring normal service to our customers as rapidly as possible while protecting the safety of our employees. If we're able to do that before other water utilities in the region, we will do our best to come to their aid as well.

Looking ahead, I remain optimistic about SJW Group's future success. COVID-19 and our shared commitment to serving customers, communities and each other has brought our four companies together in a way that we would never have imagined a year ago. Our geographic workforce and regulatory diversity has strengthened our company and positioned us well for 2021 and beyond.

To achieve our goals, we are working diligently to support the growth of our Texas Water Utility, which has more than tripled in size through organic growth and acquisitions since 2006, increased our capital investments to deliver safe and reliable service to our local communities and grow the rate base for all of our operating entities and continue to seek acquisition opportunities that create value for our stakeholders.

The prudent management of our business and financial resources continues to be fundamental to our growth and ability to return capital to shareholders, demonstrating the Company's strong commitment to our shareholders in January 2021, the Board authorized a 6.3% increase in SJW Group's 2021 dividend to $1.36 per share as compared to the total dividends paid in 2020. We're proud to have continuously paid a dividend for over 77 years and to have increased that annual dividend in each of the last 53 years, delivering value to our shareholders.

Lastly, we'd like to extend a warm welcome to Commissioner, Darcie Houck to the California Public Utility Commission and express our appreciation to outgoing Commissioner, Leanne Randolph for her service. We look forward to working with commissioner Houck and her colleagues and their staff to address the many water-related issues facing California's regulated utilities.

And with that, I'd like to turn the call back to the operator for your questions.

[Operator]

Thank you. [Operator Instructions] And your first question comes from the line of Richard Sutherland from JPMorgan.

[Richard Sunderland]

Hi, good morning. Thanks for taking my question today. Starting off on the water supply update, I'm curious if you can kind of frame levels versus where they were last year? Or just any other color to think about where we stand now in the rainy season through the, I guess, end of March end?

[Eric Thornburg, President & Chief Executive Officer]

Sure. I'll begin that and ask Jim to comment as CCS fit then afterwards. But as we said, the rainy season really ends at the end of March, typically in this area. So it's far from over. If you were to compare kind of where we are this year to last year, our reservoir has about 25 million gallons less usable supply in it than it did a year ago.

So that's about 10% difference at this point. But again, we've got six more weeks plus to go, and we'll be able to provide a much clearer picture at the end of March. And just as a reminder, this surface water supply that we own is about 6% of our total water supply availability. The positive side of this, of course, is that our usage is up, and you saw that a significant impact in the fourth quarter of 2020.

And I saw a statistic yesterday that was quite something. It showed that over the last 19 months, this is the third dryest stretch in the San Jose in history in about 120-plus years. So, it's been a very localized dry spell. But as I mentioned in my remarks, the groundwater supply here is in really great shape, and we don't anticipate any near-term supply disruptions.

[Richard Sunderland]

Got it. And then just following up there, I think it was a 50-some cents year-over-year hit quantified on the sort of the production side. Is there a way to unpack that for the usage or the supply versus what's baked into your rates, I guess, the normal level in rates versus actual 2020?

[Jim Lynch, Chief Financial Officer]

Yes. Rich, this is Jim. So interestingly enough, 2019, we had over -- we were able to produce over 5.2 billion gallons out of the watershed. So it was a significant rain year in 2019. And that followed in 2020 by about $1.2 billion that we were able to produce out of the watershed. So to give you some perspective, each 1 billion gallons, if we had to replace that, is about $4.2 million to $4.3 million from -- when we actually have to purchase that water to replace it.

And as Eric mentioned, we anticipate certainly that between the groundwater basin and the actual rain that we do receive in the area as well as surface water or we call it imported water that's available from the Santa Clara Valley Water District or Valley Water, that we will have certainly ample supplies as we move forward.

As it relates to the -- what's baked into rates per se, I believe that currently, we have about 2.5 billion gallons baked into rates. And so, that's kind of the target that we would like to achieve simply because that would make us rate neutral.

[Richard Sunderland]

Okay. I appreciate the color there. And then if I could just ask one more. The Connecticut rate case application, just curious, it seemed like in your release, you outlined there are a number of puts and takes to the rate impacts of that. But thinking about the sort of normal residential increase that was cited in your release yesterday, is there a way to quantify what that is on a percentage basis?

[Eric Thornburg, President & Chief Executive Officer]

I'll take that one, Jim. So that's a 19% increase for residential customers. I think the typical annual water rate -- annual rate for Connecticut customers in that $600 to $700 range. And again, this is the first general rate filing in 10-plus years. And so when you get that down, it's about $10.50 per month or $0.35 a day.

[Operator]

Your next question comes from the line of Hasan Doza with WAM.

[Hasan Doza, WAM]

Hasan Doza with Water Asset Management. Thank you for the color on Texas. Would love to understand -- I know it's early, a little bit more details about your plant operations in Texas. As you know, we have all been reading about water treatment plans being off-line throughout the state. So, I would love to understand how your water treatment facilities are operating and also any additional costs that you might be incurring for things like a back-up generators and so forth. So I would love to understand the dynamic a little bit more? Then I have one follow-up, please.

[Eric Thornburg, President & Chief Executive Officer]

Sure. Thanks. Hassan, nice to talk to you, thanks for your interest. Yes, you know what this is really quite an incredible situation in Texas. It's not uncommon. Of course, that's some cold snaps and even the ice storms, but sort of the combination of all these events and the, frankly, lack of any real warning in terms of the power disruptions has really impacted, as everybody knows, the whole state of Texas.

And it seems like water supplies, in particular, have been hit at this point. We have generators at our major facilities, and we have portable generators that we can pull out to our boosted systems out and around our service area. We did struggle early with access, Comal County, which is, I think, one of the top two or three fastest-growing counties in the United States. Boy, they just don't often get Ice and snow there.

And so roads were impassable for a number of days and just getting our generators out to these local neighborhoods to reconnect to booster stations was impossible. And we also, as the power went out and would come back on and then drop out again, that creates pressure waves out in the system, which results in some main breaks.

And then, of course, the cold weather, we've got a lot of customer services frozen as well. So we're making real progress, working hard at it. But until that weather turns, I think, looks like tomorrow, it starts to get above freezing on a go-forward basis the real recovery begins. So, not an issue with generators so much, but more getting access to facilities with impassable roads, and you need to get fuel out to generators and the like.

So it's been a real, real challenge. We have a boil water notice on in our facility just at an abundance of caution for our customers. And we'll release that boil order once we're able to confirm that all the water is, of course, safe to drink. So in that standard operating procedure and in coordination with Texas environmental regulators, so a tough situation, we're working hard on it.

At this point, I don't suspect we'll have material cost impacts on SJW Group. But if that were to change, we'll certainly allow adequate notice to investors and our stockholders and the public.

[Hasan Doza, WAM]

Got it. The one remaining question I have, and wanted to get your thoughts is. How should we think about a need for equity in 2021? And the reason I ask is your filing two new rate cases and I recognize the California, you have a separate cost of capital versus the rate case. But typically, it's an optimal time to align your cap structure in line with your regulatory cap structure.

And I've been noticing your cap structure in your books, you're like closer to 60% debt and 40% equity, you typically want to be aligned like 50% equity, 50% debt at the operating companies. And so, I just wanted to get a sense, given you have two rate cases pending for our education, should we think about 2021 as your the year that you may need to come for equity to realign your operating cap structures, more in line with your regulatory cap structures?

[Jim Lynch, Chief Financial Officer]

Yes. Hasan, this is Jim. So we always take a look at the -- we start by taking a look at where we are from our regulatory cap structures. And where we have committed to be with regards to our regulators across all four of the operating utilities and endeavor to maintain as close as possible that split between debt and equity.

As it relates to the parent company, our approach is really to optimize the cap structure there in consideration of the rate filings. And so, we'll be taking a look at that but also the fact that it's a good time to be heavier on the debt side than the equity side. It's also a good time to raise equity.

So, we'll explore all of the financings that are available to us as we move into the current year in consideration of where we stand with within our regulated operations. And then also, as you point out in consideration of any potential overlay of the parent company that regulators may look at as we move forward in those proceedings.

[Operator]

Your next question comes from the line of Michael Gaugler with Janney Montgomery Scott.

[Eric Thornburg, President & Chief Executive Officer]

Michael? Michael, you might be on mute. I can't hear you.

[Michael Gaugler, Janney Montgomery Scott]

Sorry about that. Just one question. With what's going on in Texas right now. Should we be anticipating essentially higher cost this quarter as a result of emergency actions?

[Eric Thornburg, President & Chief Executive Officer]

Well, like I said to the earlier question, Michael, I don't think that there will be material higher costs, but there will be higher costs. We've got people working on over time, fixing leaks and the like. But that's our smallest utility, 20,000 connections there, about $50 million in rate base, so compared to the total. But here's the advantage for Texas. We can bring our full strength to bear to support our customers in Texas.

We're actually helping field customer calls from our Texas customers in Connecticut. Our employees there are helping. So, we think that we're doing all we can to serve our customers there and get back on track. But as I said, I don't expect at this point to see material cost increases to the group. But as soon as if that were to change, we'll be transparent about that, Michael.

[Operator]

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

[Jonathan Reeder, Wells Fargo]

Good morning, Jim. How are doing?

[Jim Lynch, Chief Financial Officer]

Good. How are you?

[Jonathan Reeder, Wells Fargo]

Not too bad, just trying to stay warm, not as dire of a situation as Texas we're a little more, I guess equipped for it, you could say. So that's good, at least. But kind of curious when we look at what changed between early November when you reiterated the $1.95 to $2.05 guidance at the end of the year, the allowed results should come in at roughly $0.10 above the top end. Was that just higher consumption in California due to the dry weather that they kind of surprised?

[Jim Lynch, Chief Financial Officer]

Well, it's a great question. It's really due to two things. One, it wasn't just California, but it was across our service territories, where we did experience drier weather. We saw that in Connecticut, in the Northeast as well as Texas and California, we had a longer fall, if you will, and we're able to experience dry and warmer weather in each of our service areas. And that was a big part of it.

Another part of it, though, was actually because of the drier weather in Connecticut, we were able to extend the construction season there essentially, and we're able to work on our network infrastructure more, which provided some benefits relative to some tax deductions that we weren't otherwise anticipating.

And as you can see in my remarks, we had a negative a $0.07 impact on taxes as compared to a significant tax expense for the same period in the prior year. That was due largely to the fact that we were able to extend the construction period. So, those were the two items that kind of merged to kind of lead to the result for our fourth quarter.

[Eric Thornburg, President & Chief Executive Officer]

Yes, Jonathan, I'd just add to that. Having worked in New England for close to 11 years, I don't recall ever seeing us laying pipe in December up there and paving roads. And so the team up there did a fantastic job. And as you know, with that repair tax adoption, you're able to benefit on the income tax side, so really unusual December.

[Jonathan Reeder, Wells Fargo]

Okay. Great. And then shifting to California, the cost of capital extension request, where do things stand? Have there been any developments beyond, I guess, the consumer advocate filing that statement and opposition of the request, I guess, from our standpoint, seemingly the recent rise in rates, maybe helps to some degree with your request?

[Eric Thornburg, President & Chief Executive Officer]

Jonathan, there's been not a peep. We have nothing new to add, but we certainly would expect to hear shortly, with that one May time line out in front of us there. So I'm sure we're going to find out pretty shortly.

[Jim Lynch, Chief Financial Officer]

Jonathan, this is Jim. I want to correct one thing I said. I said $0.07. It was actually a negative 7% in taxes for the fourth quarter as compared to 6% in 2019. So, those were percentages not pennies.

[Jonathan Reeder, Wells Fargo]

Okay. I appreciate that, Jim. I think that might have been on that one slide. Then, I guess, in terms of the GRC in California, is the $100 million AMI project, is that included in the GRC's $435 million CapEx request? Or where does that AMI request stand? Because I was thinking maybe a decision by the end of '20 was expected, but I honestly, I haven't tracked it, unfortunately.

[Jim Lynch, Chief Financial Officer]

Yes. My understanding is right now, that project is still -- we're still kind of discussing that with the advocates in California. That's not included in the ask for the CapEx at this point. We're not exactly sure where that project is going to land. We think that likely it will be an advice letter project.

[Jonathan Reeder, Wells Fargo]

Okay. So that could still be outside of your budget. Would you say it's in that $1 billion five-year or it's even incremental to that?

[Jim Lynch, Chief Financial Officer]

I would include it in that. I think we are anticipating that is in that amount.

[Jonathan Reeder, Wells Fargo]

Okay. And then sticking with the GRC, what level of surface water supply does your request look to establish?

[Jim Lynch, Chief Financial Officer]

I believe I'd have to get back to you on that, Jonathan. I'm not going to speculate, but we were looking for a decrease from what was in the prior rate case because of our most recent experience that we've had coming out of the water shed up there. I just don't know at this point what that decrease was.

[Eric Thornburg, President & Chief Executive Officer]

And we'll cook to getting back to you. If memory serves, and I guess there's always a risk in this. I think it's around $1.8 billion as opposed to the $2.5, but that's a proposal and sure there'll be a lot of other puts and takes in that process there, but we'll confirm that and let you know.

[Jonathan Reeder, Wells Fargo]

Sure. Okay. But yes, you are, I guess, hopeful that you can kind of get that bar lower given some recent experience. Okay.

[Eric Thornburg, President & Chief Executive Officer]

Exactly.

[Jonathan Reeder, Wells Fargo]

Great. And then may be leaning Eric on your Connecticut experience a little bit, what's been the early feedback to that rate case filing, in particular, that request for the 50 basis points ROE premium?

[Eric Thornburg, President & Chief Executive Officer]

The case is really just getting started. I know the team, I spoke with our President there this past week more in Westbrook, and we've just begun to get some interrogatories. So, there really isn't any color I can add to the commentary here. We feel really good about the case and the overwhelming weight of it being in the capital additions already made and in place serving customers.

And so -- and Connecticut definitely has had a pattern of acquiring small systems and really enhancing their quality of service. So, I think that puts us in a very good position and make a really good case for the benefits to customers in those newly acquired areas, so optimistic, but a long way to go before we get results. It's a 200-day statutory period from filing dates. So as mentioned, we'd expect results in Q3.

[Jonathan Reeder, Wells Fargo]

Okay. And that 50 basis points premium, I guess there is precedent going back to like an Aquarion case in like 2017, is that right?

[Eric Thornburg, President & Chief Executive Officer]

Yes, that's correct. I don't know if it's 2017, but I do know that Aquarion benefited from that with purchase of a number of small systems in the state of Connecticut.

[Jonathan Reeder, Wells Fargo]

Okay. And then lastly, remind us how the allowed ROE ratio is determined in Connecticut. Is it based on your actual equity ratio for the sub? Or is it just more of a point estimate that pure deems kind of appropriate?

[Eric Thornburg, President & Chief Executive Officer]

It's based on at the sub level. And the last rate case, there was there was some controversy from -- at least from our perspective in terms of how short-term debt was calculated. I recall that we had some short-term debt there, and it was actually looked at as equity as opposed to debt. And so, we want to make sure we get the capital structure right there.

I think in the last case, it was the equity levels were right around 45.7%. So, we're going to make a strong case for that needs to be corrected in this case. But it's a long process, and we'll work hard to get that balanced.

[Jonathan Reeder, Wells Fargo]

Okay. And I mean, I guess, when you go through your earnings test there, it is predicated on what is approved in the rate case, if you said it was 45.7 or whatever. And then, I guess, it's up to you to manage the sub where you want in respect to that.

[Eric Thornburg, President & Chief Executive Officer]

Yes. In the years that have followed, of course, the Company has invested $266 million in new rate base, not including all the pipeline work that's been recovered through WECA. So -- but when they look at your annual earnings, there's a -- I think that they use current equity at that time, but that's subject to check.

[Jonathan Reeder, Wells Fargo]

Yes. No, that's what I was kind of remembering back when me and Dave would talk about it. He was saying that was maybe based on the current. So that's where I'm kind of just trying to get a handle on what was last approved versus the request, which I think was 53% or something like that and where we might land. So, okay, now appreciate you guys taking the time and answering my questions, very helpful.

[Jim Lynch, Chief Financial Officer]

Thanks.

[Operator]

Thanks. There are no further questions at this time from the phone.

[Eric Thornburg, President & Chief Executive Officer]

Thank you, operator, and thank you again for joining us on our call today. SJW Group is a company completely focused on building shareholder value, serving its customers and our fellow employees at world-class levels and continuing to grow our business, and we appreciate your interest in our organization, and thank you for attending today's call.

[Operator]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.