SJW Group

NYSE:SJW

Earnings Call Transcript 2022-Q4

[Operator]

Good day, and thank you for standing by. Welcome to the SJW Group Q4 2022 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 advised that, today's conference is being recorded.

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

[Andrew Walters, Chief Financial Officer & Treasurer]

Thank you, Operator. Welcome to the Fourth Quarter and 2022 Financial Results Conference Call for SJW Group. I will be presenting today with Eric Thornburg, Chair of the Board, President and Chief Executive Officer; and Bruce Hauk, Chief Operating Officer. For those who would like to follow along, slides accompanying our remarks are available at 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. As a reminder, this webcast is being recorded and an archive of the webcast will be available until April 24, 2023. You can access the press release and the webcast at our corporate website.

I will now turn the call over to Eric Thornburg. Eric?

[Eric Thornburg]

Thank you, Andrew. Welcome, everyone, and thank you for joining us. I'm Eric Thornburg, and it is my honor to serve as Chair, President and CEO of SJW Group. 2022 was a strong year for our company. We thank our employees for their passion to serve customers, communities and each other while being good stewards of the environment. And they do so in a manner that embodies our core values and honors our culture which is essential for long-term success.

Earlier this year, Bruce Hauk became our Chief Operating Officer. He joined SJW Group in mid-2022 and brought with him 26 years of industry experience and a leadership style that aligns with our company's values. He has already proven to be an integral member of our executive leadership team, and I'm pleased to have him join us today on this call to discuss regulatory updates, 2023 capital expenditures, and the growth of our Texas operation. After my initial remarks, Andrew will review the financial results of the company and our guidance for 2023.

As I mentioned earlier, 2022 was a successful year for us. Our leaders and their teams expertly navigated challenges and delivered solid results. Firstly, earnings per diluted share of $2.43 per share. These results were affected by a number of factors, including a delayed cost of capital proceeding and inflationary pressures, which the company successfully managed.

Second, delivery of $219 million in infrastructure investments despite supply chain challenges. Third, a total shareholder return of 13.4% for 2022, which compares favorably to the S&P 1000 utility sector total shareholder return of negative 0.6%. And fourth, we were just 1% of 11% of Russell 3000 companies to have a gender balance board.

One of our biggest achievements for the year was the constructive settlement agreement that was approved by the California Public Utilities Commission. It not only addressed the water supply mix challenges in California that had impacted our financial results in 2020 and '21, but also provided a benefit to customers. Given the meaningful progress achieved in our 2022 rate filings, we are pleased to provide a projected long-term growth rate of 5% to 7% based off of our 2022 diluted EPS.

Andrew will now discuss our financial results and 2023 guidance in greater detail.

[Andrew Walters, Chief Financial Officer & Treasurer]

Thank you, Eric. Yesterday at the close of business, we released our fourth quarter and 2022 operating results. In the fourth quarter, we reported revenue of $171.4 million and net income of $33.5 million. Our diluted EPS of $1.09 per share. This compares favorably to 2021 quarterly revenue of $139.7 million, reflecting a 23% increase and net income of $18 million, reflecting an 86% increase and a diluted EPS of $0.60, reflecting an 82% increase. The significant increases were driven by the true-up of revenue for the prior period this year in the fourth quarter due to the approval of the California General Rate Case.

For 2022, we reported revenue of $620.7 million and net income of $73.8 million or a diluted EPS of $2.43. This compares favorably to 2021 annual revenue of $573.7 million, reflecting an 8% increase; net income of $60.5 million, which reflected a 22% increase or diluted EPS of $2.03, reflecting a 20% increase.

As you can see, the 20% year-over-year increase in diluted earnings per share for 2022 was primarily driven by revenue increases of $1.56 per share, which I will break down for you shortly. The increase in diluted earnings per share is also attributable to production costs that better match our actual cost in California contributing $0.21. In fact, the recovery in owned water supply benefited customers in California, a welcome outcome for all. These increases were partially offset by an increase in water supply cost of $0.84 per share, which also will break down shortly, as well as increases in depreciation due to prior investments. Inflation impacted the company's earnings in 2022, particularly due to investments in our employees that help drive the increase in administrative and general as well as higher interest costs due to the interest rate increases in addition to new investments in infrastructure that benefit our customers.

As promised, a breakdown of the 8% increase in revenue compared to 2021. The revenue increase was mostly driven by $38.7 million in cumulative water rate increases and $20.7 million in the true-up related to the San Jose Water Company general rate case that was approved and recognized in the fourth quarter and retroactive to January 1, 2022.

It's worth noting that customer growth has become a more significant contributor to revenue, particularly in our Texas utility, adding $5.1 million in total across our utilities. Partially offsetting the increases where decreases of $14.3 million associated with lower customer usage. As a reminder, San Jose Water Company continues to operate under a mandatory call for water conservation declared by Valley Water, our wholesale water supplier.

The declaration called for a 15% reduction in 2022 water consumption as compared to 2019. During 2022, conservation by our California customers resulted in a usage decrease of 11% for residential customers and approximately 6% for business customers.

Also as promised, some detail about the water production expenses for the year. There was a modest 2% increase in total water production expenses from 2021 that was primarily driven by increases in water and energy pricing of $28.6 million. Partially offsetting the increase in expenses was $15.3 million decrease in production-related costs to lower customer usage and increase in owned water supply in California that reduced costs by $7.3 million. And an increase of $2.3 million in balancing and memorandum account cost recovery.

The 10% increase and total other operating expenses compared to the prior year was primarily driven by an increase in depreciation of $10 million. An increase in general and administrative expenses of $6.6 million, reflecting higher operating costs and labor costs and an increase in maintenance costs of $4.7 million that included $3.7 million from the order instituting investigation. And finally, an increase in taxes other than income of $1.6 million due to increased assets in our utilities.

A $2.2 million impairment of long-lived assets in the fourth quarter of 2021 did not repeat in 2022, partially offset the increased expenses. $165 million was raised by SJW Group in 2022 through equity and debt issuances at competitive share prices and interest rates. Two of the debt issuances; Connecticut Water Company's $25 million senior notes and San Jose Water Company's $70 million senior notes were funded on December 15, 2022 and January 25, 2023. At the end of 2022, we had $190 million available and $160 million drawn on our bank lines of credit for short-term financing of utility plant additions and operating activities.

The average borrowing rate for the line of credit advances during 2022 was approximately 3.41%. The average borrowing rate for the same period in 2021 was approximately 1.32%. Of note, the SOFR secured overnight funding rate was 0.05% on January 4, 2022, which compared to 4.55% on February 16, 2023.

Also like to highlight that over the same period, the 30-year treasury rate nearly doubled and were more than double at times during 2022. The effective income tax rate for 2022 was 10% compared to 11% in 2021. We are announcing our 2023 guidance of $2.40 to $2.50 per diluted share and updating our five-year capital investment outlook to $1.4 million from $1.3 billion -- sorry, $1.4 billion from $1.3 billion.

Our infrastructure investments are critical to the company's mission to reliably provide safe and high-quality water to our customers and communities. 2022 diluted earnings per share of $2.43 excluded adjustments related to the California cost of capital proceeding given the delay in the decision. While the 2022 guidance range included the cost of debt adjustment in the company included in its testimony the CPUC.

Factors impacting the 2023 guidance include, no significant rate case decisions expected in 2023, continued inflation affecting interest costs, labor costs and other expenses as well as a constructive cost of capital ruling in California.

To spend a minute on inflation in 2022, it drove significant increases in interest cost, labor cost and chemicals expenses. As I noted earlier, interest costs increased dramatically during 2022. We expect that 2023 will include the full impact of those increases compared to 2022, which started with historically low rates.

Labor costs also increased significantly in 2022 and will continue to increase into 2023. Chemical spend increased at an estimated compounded rate of 20% since year-end 2020 and 39% from last year alone. While some of the chemical cost increases reflect the changing mix of water types and acquisitions, the universal factor was inflation across the utilities.

As I've highlighted, inflation is a significant factor in the financing markets with impact on the return requirements necessary to attract capital. The interest rate environment certainly supports a higher ROE than currently authorized and ROEs for California water utilities are lower than the national average.

We made a strong case for the proposed ROE in our application to the commission for the cost of capital proceeding and are optimistic that the commission will consider all the supportive factors for an increased ROE when making its decision. While I can't comment further on the proceeding, we remain hopeful for a constructive outcome.

As a final note on inflation, our California Utility has inflation adjustment mechanisms in the forward rate cases that help offset some of the inflationary impacts. Our company plans to execute a number of rate cases that Bruce will discuss further that should help reduce inflationary impacts in 2024 and help with the recovery on and of investments made in our system.

The company is instituting guidance for long-term EPS growth rate. The new five-year growth target is 5% to 7%, anchored off of 2022 diluted EPS of $2.43. Importantly, the year-over-year growth is not expected to be linear given the relative contributions of each utility and rate case timing.

With that, I turn the call over to Bruce.

[Bruce Hauk, Chief Operating Officer]

Thank you, Andrew. As was mentioned earlier, in the fourth quarter, we realized the full benefit of the CPUC approved settlement agreement between San Jose Water Company and the Public Advocates Office for the 2021 GRC that covers 2022 through 2024 interim and outstanding revenue for 2022 of $25.1 million, as well as the recovery of memorandum and balancing accounts amounting to $18.2 million. We, along with our other fellow Class-A water utilities in California, continue to await a decision in the cost of capital proceeding.

While we have seen higher-than-normal precipitation in San Jose Water Company’s service area this rain season and Lake Elsman, our largest owned California surface water supply is at full capacity. The State of California is still in a multi-year drought, recent rains have help, but the drought declaration remains very much in effect.

Regulatory mechanisms remain in play to balance the need to aggressively promote water conservation, while providing the company an opportunity to earn its authorized return. Furthermore, the combination of the full cost balancing account authorized in our GRC and our Water Conservation Memorandum Account afford the same benefit as with a full decoupling mechanism and should further minimize our earnings volatility and maximize the opportunity to earn our authorized ROE.

Senate Bill 1469 restored water utilities' ability to request, to establish or reestablish a decoupling mechanism in a future GRC application. We anticipate requesting decouple in a future application, given the drought conditions, which demand a strong conservation of response, we believe pursuing decoupling will allow us to be aggressive on that front, while also ensuring we can recover our fixed costs.

Our advanced metering infrastructure project is moving forward. The $100 million authorized by the CPUC for this project is on top of the three-year capital budget approved in the GRC. There will be a modest expansion in 2023, with the bulk of spend to occur in 2024 through 2026.

In Connecticut, we filed for a water infrastructure conservation adjustment increase, to recover $27.8 million in completed projects. If approved by the Public Utilities Regulatory Authority, as filed, the increase would generate $3.1 million in annualized revenues and will bring the cumulative WICA to just over 6%. A decision is expected in the first quarter of 2023, with any authorized increase effective on April 1, 2023.

Last month, the Maine Public Utilities Commission approved general rate case applications in four of our Maine Water’s operating divisions. The rate increases were all retroactive to January 1, 2023, and will generate $692,000 in annualized revenue. Step three of Maine Water's multi-year GRC and the Biddeford-Saco Division will be filed in the first quarter of 2023. This filing will reflect the operating cost of the new Saco River Drinking Water Resource Center that went online in the summer of 2022.

Our Texas subsidiary, SJWTX filed an application for a system improvement charge at the end of 2022. Since our last General Rate Case in 2014, the company has invested more than $43 million in drinking water and wastewater infrastructure that is in service and providing a benefit to customers.

Our system improvement charge filing, request recovery of $14.8 million in improvement that were made between January 1st, 2020, and September 30th, 2022. The FIC charge has submitted would increase the bill of the average residential customer using approximately 7,000 gallons per month by less than $5 per month or about $0.16 per day.

The filing to expand our WCCM with the PUCT is pending for the transfer of more than 500 acres of water service area and more than 300 acres of wastewater service area from the San Antonio water system to SJWTX. San Antonio has already approved the service area transfer. No customers would be effective.

In January, SJWTX filed applications with the PUCT to acquire KT Water Resources and KT Water development. KT Water Development is a water utility that serves about 560 customers in Southern Comal County with the potential to add additional customers. SJWTX application requested fair market value and applied rate octane treatment, two constructive regulatory mechanisms available to us in Texas.

KT Water Resources is a wholesale groundwater supplier to KT Water Development. KT Water Resources once interconnected with the SJWTX Water Systems will significantly increase the efficiency and resiliency of our water systems, allowing us to meet projected customer growth through 2070. We anticipate PUCT decisions on these applications in the third quarter of 2023.

SJWTX now serves more than 26,000 water and wastewater connections between Austin and San Antonio. And that service areas are located in three of the five fastest-growing counties in the United States. SJWTX has quadrupled its customer base, in 16 years under SJW Group, providing service to about 76,000 people today.

SJW Group has a $255 million capital expenditure budget for 2023 and plans to invest $1.4 billion through 2027. We -- about $90 million is budgeted in 2023 for pipe replacement as part of our long-term goal to replace approximately 1% of our water mains every year. Approximately two-thirds of our infrastructure investments are forward-looking or recoverable through infrastructure recovery mechanisms which help to minimize regulatory lag.

There are several key projects that support growth and reinforce our position, as a best-in-class water and wastewater provider. Looking across our operating regions, some of these projects include, in California, the purchase of installation of 5,500 acoustic leak detection sensors to enhance our already robust leak detection program.

Our current unaccounted for water at San Jose Water Company is 8.9%, which is well below the industry average. In Maine, we are currently developing two new source wells and CAGR falls to address the reduction capacity of the existing wells sources and replacing the existing groundwater treatment facility. Connecticut, we are replacing 1970s groundwater treatment facility and our largest water system. And in Texas, we are installing a number of water storage tanks to meet the needs of our rapidly growing service area. The tank picture is going into service this month.

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

[Eric Thornburg]

Thank you, Bruce. We know infrastructure investments are necessary to ensure high-quality drinking water, reliable service and a healthy environment, but investing in our people is just as critical to achieve our mission. We are fortunate to have high-quality talent that executes on our strategies, and provides exceptional service to our customers and communities daily, and we recognize our teams are affected by the same inflationary pressures impacting our business.

We have a commitment to our people to be good stewards of their careers and to maintain a world-class culture. In response to the recent surge in inflation in 2022 and 2023 to-date, we also invested in our workforce through wage and benefit adjustments that exemplified our commitment to them and their families.

Last month, SJW Group published a supplement to its 2021 corporate sustainability report. The report is available at our website. Our 2022 report will be available later this year. These reports detail the work we have done and will continue to do to live up to our commitment to be exemplars of corporate social responsibility.

We continue to have strong institutional shareholder services ESG ratings. Further, GRESBs infrastructure assessment places SJW Group in the top quartile of our comparison group, which includes many of our water utility peers. In 2022, we helped secure nearly $10 million in financial assistance for customers who were in arrears on their bills through various state and federal programs. This assistance supplements already existing programs to ensure access and affordability to customers within our service areas.

In 2023, we're planning for the installation of additional solar arrays to offset our purchased electricity and we will begin the electrification of our vehicle fleet in California. We extend a warm welcome to Commissioner Karen Douglas, on her appointment to the California Public Utilities Commission and thank Commissioner Clifford Rechtschaffen for his many years of dedicated service.

We also congratulate Commissioner John Reynolds on his recent reappointment and confirmation. We look forward to working with the new commissioners and their staff to address the water-related issues facing California's regulated water utilities.

I would like to take a moment to recognize our retiring leaders and their successors. I thank Maureen Westbrook for her leadership at Connecticut Water and SJW Group. Maureen retired as President of Connecticut Water in December after a distinguished 34-year career at the company. She was a champion for investor-owned water utilities and fought for policy and legislation that protected the company and its customers.

We welcome Craig Patla, as Connecticut Water's new President. He was most recently the company's Vice President of Service Delivery. Craig has been with Connecticut Water for 32 years and has been a leader in our New England operation for nearly a decade. Craig's promotion is evidence of the high-quality talent we have at every level of the organization and the success of our talent management program.

I also want to thank Wendy Avila-Walker for her leadership. Wendy is retiring next month as San Jose Water Company's Vice President of Finance, Assistant Treasurer and Controller at SJW Group. Among Wendy's considerable accomplishments over her 17-year career was the integration of accounting teams and systems following our transformational merger with Connecticut Water.

I am pleased that Rally Zerhouni will be assuming Wendy's duties. He joined us earlier this year as Senior Vice President, Principal Accounting Officer. Rally comes to us from Veolia North America Regulated Utilities, where he was the Chief Financial Officer. Rally is a consummate professional with a deep understanding of investor-owned utility accounting and finance functions. His leadership style aligns well with our strong culture of teamwork, respect and transparency.

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

[Operator]

Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from the line of Angie Storozynski with Seaport Research, Angie, your line is open.

[Angie Storozynski, Seaport Research]

Thank you. How are you guys?

[Eric Thornburg]

Hi, Angie.

[Angie Storozynski, Seaport Research]

Good afternoon. Good results. Just -- so two things. One is -- and I know you said it in your prepared remarks, but I just wanted to confirm it. Do you have in your 2022 EPS, a negative impact associated with the true-up in the cost of debt from the pending cost of capital proceeding?

[Andrew Walters, Chief Financial Officer & Treasurer]

Eric, go ahead.

[Eric Thornburg]

I'm so sorry. Yeah, Angie, this is something that we've had factored into our results, because -- at least our guidance, because we knew for -- with pretty high certainty that we'd only asked for that amount of recovery related to our debt, and it did have a $0.10 decline.

[Angie Storozynski, Seaport Research]

But it is in actual results as well.

[Eric Thornburg]

No, it's not. That's why…

[Angie Storozynski, Seaport Research]

It's not. Okay. So hence the $0.10, okay. And then the effective tax rate, 10%, that seems meaningfully lower than what you had expected, right? And I understand that it's only 100 bps delta year-over-year, but I think going into the year, you had expected 16%. Is that fair?

[Eric Thornburg]

Yeah, that's correct. And we were -- we had slightly better results that came out of our studies on repair tax and some of the other items in P&L to favor the company.

[Angie Storozynski, Seaport Research]

And what is embedded in the 2023 guidance? What is the effective tax rate?

[Andrew Walters, Chief Financial Officer & Treasurer]

It's similar to the tax rate that we have for this year, but…

[Angie Storozynski, Seaport Research]

Okay. Okay. Good. Thank you. Those were the core points. And then, I mean, do you guys have any guidance roughly when to expect a decision on the cost of capital, has there been any, I don't know, outreach from the commission? Any signs for the ALJ is nearing an issuance of a proposed decision?

[Eric Thornburg]

Angie, this is Eric. I sure wish we could provide a little insight, but we've got no further indication of timing here. So we'll all find out together, I suspect.

[Angie Storozynski, Seaport Research]

Okay. And the automatic 50 bps increase in the ROE, which was triggered by the end of September, you haven't filed for it, right? So the clock is ticking in a sense, right? So it's either going to be automatically embedded in the proposed decision for the final decision, or you will have to make a filing once the decision is out? Is that fair? But basically, it's not like it's going to be retroactive to 1/1/23?

[Eric Thornburg]

Andrew, do you want to…

[Angie Storozynski, Seaport Research]

We don't know

[Andrew Walters, Chief Financial Officer & Treasurer]

Yes, Eric. I'll take that. So Angie, I think the answer is that we unfortunately don't know what the decision holds in it. And that's the reason why it's hard to file for something when you know what you're filing off the base of, and that's why there has been no filings to date.

[Angie Storozynski, Seaport Research]

Okay. And then changing topics completely. So the Texas acquisitions, so I'm just thinking aloud here. So there's been a slowdown in the housing market. You guys are clearly buying areas which should be tone to benefit from new construction, and I know that, that's probably a multiyear cycle to start with, but just give us a sense how soon should we actually see any earnings contributions from those investments?

[Andrew Walters, Chief Financial Officer & Treasurer]

Sure. Angie, a couple of things I'll say is for the investment from Kindle West, we already saw earnings contributions in 2022. And -- it was accretive right from the very beginning, and that's obviously very positive for the company. The other thing that I'll just highlight is while construction activity and housing sales have been reduced across the country, and they have, to some extent, in Texas as well. We're still seeing activity. And even during the last economic downturn, while we did see an absolute decrease in the number of sales happening, we still saw growth even in the depth of the recession at the time.

[Angie Storozynski, Seaport Research]

Okay. And then one last one. I know I said it was last one. But -- so Andrew, you're pointing out that the growth is non-linear. And is it mostly a function of the Connecticut rate cases? So basically almost as if every other year, I have a weaker year as I'm trying to catch up on the cost side to a filing in Connecticut and then the following year is a little bit above growth about I'm going basically above that 5% to 7% CAGR. Not CAGR, annual growth?

[Andrew Walters, Chief Financial Officer & Treasurer]

Yeah. The way to think about it, so we've got -- if you break up the divisions into California is a very significant division, while we do get inflation adjustments, it never meets the actual cost that we actually incur, right? So the cost will outstrip what the adjustments we do get. So we get an uplift in that. So that's one of the years, right? If it's a three-year cycle, and we're also going to do Connecticut in a three-year cycle. The Connecticut rate case has one year where it goes up and being a historic test year, you will go -- you will lose ground in those intervening two years, offset by our investments in infrastructure for WICA but we're obviously carrying the cost for those investments as way, right?

So you're kind of getting made whole on what you're making. So you're correct in thinking about Connecticut is going to have a negative impact for the years that we're out in terms of the growth rate, but then it catches up. The same goes for Main and obviously to a much lesser extent. Actually, Texas continues to have very solid growth. But as we continue to invest in Texas, that same trend will continue as we need to think about the timing of the rate cases and hence, why we can't have a linear growth rate because we don't have three equal legs to our stool. We've got different lengths of the store.

[Angie Storozynski, Seaport Research]

Great. Thank you. That's all I have. Thanks.

[Operator]

Thank you, Angie. Our next question comes from the line of Richard Sunderland with JPMorgan. Please hold while I promote him to propose his questions. Richard, your line is open.

[Richard Sunderland, JPMorgan]

Hi, good morning. Can you hear me?

[Operator]

Yes. Sure.

[Richard Sunderland, JPMorgan]

Okay. Great. We've covered a lot here, but you circle back to Connecticut in the rate case strategy, you spoke to through your rate cycle -- just curious how you see that relative to, I guess, the tools available to you? And – is it really the ability to roll in capital in the interim driving that? I guess, I'm asking from is we've had, I call it, a challenging data point out of the state recently for one of your peers. And I'm curious, if that impacts your benefit strategy at all?

[Eric Thornburg]

Thank you, Richard. It's a great question. And first, I'd point out the data point is a draft decision in the Aquarion rate case with a final decision expected in mid-March. And Richard, I think it validates our overall strategy in Connecticut of providing for more frequent filings of a general rate case nature and keeping the request lower with fewer issues.

In Aquarion's case, they had been out nearly 10 years and then come in and ask for about 27% phased in over a couple of years. And when you stay out that long, as we found out in the past, you just have a whole plethora of issues to contend with and – and it was pretty clear from the tone and tenor of their case, they just couldn't get any firm footing. So we remain committed to that strategy.

That being said, we're going to take careful note of this final decision and then do our due diligence with policymakers and make any adjustments that we need to going forward. But again, I think it validates the need to go in more frequently, fewer issues, lower amount and keep doing the good work that we do.

[Richard Sunderland, JPMorgan]

Great. That's very helpful color. And then circling back to the growth rate, just trying to parse this a little bit further, so I appreciate kind of the different legs of the stool and how that contributes to the non-linearity of growth. But just to look at this a little bit more in the near term, is that certainly the right way to think about the trajectory within that CAGR is the

three-year rate cycle that you spoke to for Connecticut and California, or do you see the – the growth in Texas papering over that somewhat in the interim. I guess I'm trying to think about walking to 24%, given 23% is a little bit flatter in terms of the growth.

[Eric Thornburg]

Yes. Thank you, Richard. Andrew will give you the first shot at that one.

[Andrew Walters, Chief Financial Officer & Treasurer]

Thank you, Eric. Richard, I think the key is you've already highlighted it, is that Texas is not really big enough to paper over Connecticut at this stage. It's continuing to grow at a rate that, that may change in the not-too-distant future, but we're not there today. There's also within Maine, we have 12 different rate divisions, right? And that's the other aspect that you got to keep in mind is while we're going in for our largest division, in 2023 with rates that will be effective in 2024, it's not something that will kind of allow for an even growth like. So I think what we will do is we do our best to maintain a good cost control structure on our utilities for those years that were out of significant rate case activity. And to Eric's point, we'll be focused on making sure that we create the best outcomes for the years that we are in for those rate cases.

[Richard Sunderland, JPMorgan]

Got it. That makes sense. One final one for me just on the 2023 guidance itself and cost of capital assumptions. It looks like there's nothing assumed around the trigger given the uncertainty here, but just wanted to be clear on you have baked in for that, if anything?

[Eric Thornburg]

Yes. For that particular item, I'm just not going to comment at this stage, given our kind of where we are from a rate case, our cost of capital case perspective. So I will defer on that one.

[Richard Sunderland, JPMorgan]

Fair enough. Thank you for the time today.

[Eric Thornburg]

You bet. Thank you.

[Andrew Walters, Chief Financial Officer & Treasurer]

Yes. Thank you, Richard.

[Operator]

[Operator Instructions] Our next question comes from the line of Jonathan Reeder with Wells Fargo Securities. Jonathan, go ahead

[Jonathan Reeder, Wells Fargo Securities]

Hey. How's everyone doing today?

[Eric Thornburg]

Hi, Jonathan.

[Jonathan Reeder, Wells Fargo Securities]

Good. Good. So I think Angie asked most of my questions and then you just kind of punted on the cost of capital, but can you at least kind of reiterate what you did say, around your expectations or what you mean by the constructive cost of capital ruling that's embedded in the guidance in the 5% to 7%? I think I kind of missed that in your prepared remarks.

[Eric Thornburg]

Sure. Sure, Jonathan. And I think there's a couple of things that we talked about in the prepared remarks of what we expected from a cost of capital aspect. And I think -- when you think about where we started, just from an inflation perspective and where we start from an interest rate perspective, which has a direct alignment to ROE, the interest rates have gone up dramatically, right? That's one thing to note.

And I talked about how the treasuries have more than -- or doubled or a little bit less than double how we've had like a 90 times increase in – in the rates associated with the SOFR base rate. So what I talked about, I said, interest rate environment certainly supports the higher ROE. And the other point that I made in here was that the California water utilities are actually lower than the national average. So as opposed to others that have had recent decisions on cost of capital that were above the national average, the water utilities are actually lower than the national average. That, coupled with the fact that you have an adjustment that would theoretically take place, all support the idea of an increased ROE at this point, which matches with what our testimony was when we filed the case.

[Jonathan Reeder, Wells Fargo Securities]

Okay. So is it fair to assume based on that, like the guidance assumes the allowed ROE, your current allow is 8.9% that it's certainly at least at that level, if not higher.

[Andrew Walters, Chief Financial Officer & Treasurer]

Yes, I'm just not going to comment at this particular point given where we are, but that's where I'll stop there.

[Jonathan Reeder, Wells Fargo Securities]

Okay. How about on the equity ratio? Because if I recall, I think you're kind of asking for, is it like a 200 basis point increase in your equity ratio from like 53.3% to 55.3%?

[Andrew Walters, Chief Financial Officer & Treasurer]

Yes. I think where the equity ratio is ultimately likely to come as similar to where we are today.

[Jonathan Reeder, Wells Fargo Securities]

Okay. Okay. That's helpful. All right. Thanks. The only other question I have is related to that SIC filing system improvement charge in Texas. I know you said -- covers $14.8 million, and that's invested since the beginning of 2020. Is that like all you could do under that mechanism, or did you just file for a fraction of it in order to kind of manage customer bill impacts. What was kind of the rationale there?

[Eric Thornburg]

Yes. Thank you, Jonathan. Bruce, would you like to comment on that one?

[Bruce Hauk, Chief Operating Officer]

Sure. Thank you, Eric, and thank you for the question, Jonathan. And it's the latter of what you suggested. We were definitely able to file for more, but under customer affordability and what have you, it really tempered that, and we expect to come back in multiple filings potentially to capture that.

[Jonathan Reeder, Wells Fargo Securities]

Okay. So you could come back with another SIC filing later on. It doesn't have to be a full-blown rate case to kind of?

[Bruce Hauk, Chief Operating Officer]

Correct. Sorry, to interrupt, that our understanding of the mechanism and which we filed this first one, once we get natural order from the commission. We have four years to come in and do a regular GRC and we could do subsequent SIC filings, if you will, between them

[Jonathan Reeder, Wells Fargo Securities]

Okay. Excellent. I appreciate that detail. And yes, good luck with the cost of capital, continue to wait every day for the decision and I appreciate the guidance and the long-term kind of growth update here. So thanks for your time.

[Bruce Hauk, Chief Operating Officer]

Great. Thank you, Jonathan.

[Operator]

[Operator Instructions] If there are no additional questions, I would like to now turn the call back over to Eric Thornburg for his closing remarks. Eric?

[Eric Thornburg]

Thank you, operator, and thank you, everyone, for participating in our call today. We really appreciate your interest in our company and your support of us. We're really proud of our people and their service to our customers, our communities our shareholders and one another. And we look forward to chatting with you in the not-too-distant future and keeping you apprised of our progress. So thank you all. Have a wonderful weekend.

[Operator]

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