H2O America

Good day and thank you for standing by. Welcome to the SJW Group Q1 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the question during the session, you will need to press star 1 on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. James Lynch. Sir, please go ahead.

Thank you, operator. Welcome to the first quarter 2021 financial results conference call for SJW Group. I will be presenting today with Eric Thornburg, Chairman of the Board, President and Chief Executive Officer, and Andy Gere, President and Chief Operating Officer of San Jose Water Company. 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 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, we refer you to the financial results press release in our most recent forms 10-K, 10-Q, and 8K filed with the Securities and Exchange Commission, copies of which may be obtained on our website. While forward-looking statements are made as of today, an 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 July 26, 2021. You can access the press release and the webcast at our corporate website. I will now turn over the call to Eric.

Thank you, Jim. Welcome, everyone, and thank you for joining us. I am Eric Thornburg, and it is my honor to serve as chairman, president, and CEO of SJW Group. We're now more than 13 months into the COVID-19 pandemic. I would again like to thank our employees and the nation's other essential workers for their efforts over the past year, to serve customers, communities, and each other during the pandemic. There is a sense of cautious optimism that the worst is behind us, and we have begun planning for the safe return to our offices and work centers. Over the past year, we've learned much about our teams, our culture, how we can adapt, and what we can achieve through remote work. Despite the challenges, our people have personified our mission, trusted professionals, passionate about delivering life-sustaining, high-quality water and exceptional service to families and communities while protecting the environment and providing a fair return to shareholders. Looking ahead, we are preparing for a phased return to our offices and worksites, building on our established risk-based process that has served us well during the past year. We will adhere to the safety guidelines provided by our national, state, and local health authorities. Our goal remains the same as it has been throughout the pandemic, to deliver on our public health mission as a water service provider and protect our employees, customers, and communities. I and the rest of our executive leadership team are looking forward to the day when we can express our appreciation to all employees in person and meet the new employees who have joined our team over the past year without having set foot in our offices. We are committed to a safe return that seizes the benefits of remote work while providing a safe physical environment to nurture collaboration and our culture. The extreme cold and winter weather experienced in Texas last February proved the benefits of a pure play water and wastewater utility with national scale, geographic diversity, and locally focused operations. SJW Group was able to draw on resources from our operations on the east and West Coast to assist our Texas operation during the event. While our Texas employees focused on system impacts, our Texas customers had their calls answered in the morning by our Connecticut call center and in the afternoon by our California team. Our communications teams from both coasts assisted with customer notifications, as well as website, social media, and news media updates, while our operations and safety teams provided valuable incident support. The direct experience of the Connecticut and Maine teams dealing with cold weather events added to our response. In California, the rainfall season is largely behind us. We have experienced lower than normal precipitation for the second consecutive year, and that is impacting available surface water supplies produced from our watershed. I'd like to now turn it over to Andy Gere, President and Chief Operating Officer of San Jose Water Company to provide more granularity on our water supply situation. Thank you, Eric.

The very low precipitation that we have experienced in the Santa Cruz Mountains this winter has had a significant impact on our local surface water operations, both in terms of storm runoff collected at the creek intakes for immediate treatment, as well as the volume of water that we've been able to impound in our Lake Ellsman Reservoir for release later in the year. For the first time in my 25 years at San Jose Water, we are temporarily taking our Montevino water treatment plant offline due to low supply. We will bring the plant back into service when hydrologic conditions allow. To provide some perspective, the chart on slide 10 shows the historic surface water production in blue compared with the associated rainfall at Lake Ellsman in red over the same period. As you can see, there's been just one other year, 2014, where we saw such low levels of rainfall and surface water production. Fortunately, the regional water supply picture is somewhat better, and despite the low rainfall and snowpack this winter, the total groundwater storage at the end of the first quarter remained at stage one, or normal, of Valley Water's water shortage contingency plan, based on available recharge and the current rate of withdrawal. Valley Water reports that it is forecasting to remain in the normal range through year-end by supplementing normal supplies with additional imported water. That bodes well for the upcoming summer months when demands are typically highest and we anticipate adequate supplies to serve our customers. With that, I will stop and turn the call back over to Eric. Thank you, Andy.

As a result of the water supply situation in California, we anticipate increases in our operating costs through the reliance on purchase water from our wholesaler to meet our customers' needs in 2021. Currently, every billion gallons of purchase water as an incremental cost to the company of $4.2 million more than using our own supply sources. As a direct result of the water supply outlook and in full transparency, we are announcing guidance of $1.85 to $2.05 per diluted share in 2021. This assumes no additional company produced surface water in California for the remainder of 2021. We are in the process of updating our strategic water supply plan to evaluate current and future supply reliability and resiliency. Our current California general rate case proceeding will address the impact of surface water availability. The prudent management of our business and financial resources continues to be fundamental to our growth and our ability to return capital to shareholders. We are proud to have continuously paid a dividend for over 77 years and to have increased the annual dividend in each of the last 53 years, delivering value to our shareholders. I will now turn the call over to Jim, who will review our first quarter financial results. After Jim's remarks, I will address regulatory and other business matters. Jim? Thank you, Eric.

Our first quarter operating results reflect new revenues authorized by our 2019 California general rate case, water infrastructure conservation adjustment, and water infrastructure surcharges authorized in Connecticut and Maine, and customer growth in Texas. These increases were offset by a decrease in customer usage, the impact of a February ice storm in Texas, and a decrease in available low-cost surface water due to the dry weather conditions in California that Eric and Andy just discussed. First quarter revenue was $114.8 million, a 1% increase over the first quarter of 2020. Net income for the quarter was $2.6 million or $0.09 per diluted share, an 8% increase over net income of $2.4 million or $0.08 per diluted share reported in the first quarter of 2020. The increase in diluted earnings per share for the quarter was primarily attributable to cumulative rate increases of 8 cents per share, cumulative cost savings of 4 cents per share, a tax benefit of 4 cents per share, and an increase in non-regulated income of 3 cents per share. The diluted per share increase was partially offset by a decrease in customer usage of 8 cents per share, customer credits in Texas totaling 2 cents per share issued in connection with the February ice storm, a decrease in the availability of surface water of two cents per share, and an increase in depreciation and amortization of six cents per share. A revenue decrease was a result of $2.8 million in decreased customer usage. In addition, customer credits in Texas reduced revenue by $700,000, and net changes in certain balancing and memorandum accounts reduced revenue by $600,000. These decreases were partially offset by $2.8 million in cumulative rate increases and $500,000 in revenue from new customers. Total 2021 first quarter water production costs were slightly lower when compared to the first quarter of 2020. The minor reduction was primarily due to $800,000 in lower average per unit costs for purchased water, groundwater extraction and energy charges and lower usage. partially offset by a $700,000 increase due to the purchase of additional water supplies to supplement the lower level of surface water production we experienced during the quarter. Other operating expenses increased $1.6 million or 2% for the quarter, primarily due to $2.1 million in higher depreciation related to utility plant additions and $200,000 in higher maintenance expenses partially offset by $400,000 in lower general and administrative expenses. In addition, in the first quarter of 2020, we incurred $400,000 in merger related expenses. No similar expenses were incurred in 2021. The effective consolidated income tax rates were approximately negative 52% and 15% for the quarters ended March 31st, 2021 and 2020 respectively. The lower effective tax rate for the quarter ended March 31, 2021 was primarily due to excess tax benefits relating to share based payment awards, state tax credits, and other discrete tax items. Turning to our capital expenditure program, we added $46.7 million in company funded utility plan during the first quarter of 2021. This represents 20% of our total 2021 plan capital expenditures. From a financing perspective, first quarter 2021 cash flows from operations increased 321% over the first quarter of 2020. This change was primarily the result of a decrease in accounts payable and accrued expenses of $8.3 million, an increase in accounts receivable collections of $2.2 million, and a $1.5 million increase in net income adjusted for non-cash items. In addition, in 2020, we made an upfront payment of $5 million to the City of Cupertino in connection with our service concession agreement and refunded $8.4 million to California rate payers that were accumulated in our 2017 PACT Act memorandum account. No similar payments were made in 2021. In March 2021, SJW Group issued approximately $1.2 million I'm sorry, 1.2 million of new shares in an offering that raised net proceeds of approximately $66.9 million. Proceeds from the offering were used to repay outstanding balances on the company's credit facilities and for general corporate purposes. In addition, in April 2021, the company's California subsidiary entered into a $140 million credit agreement and the company's Texas subsidiary entered into a $5 million credit agreement, both with JPMorgan Chase Bank. The new credit agreements replaced the existing JPMorgan Chase credit agreements, which have been paid off and were set to mature and expire on June 1st of 2021. At the end of the first quarter, we had $138 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 the quarter was 1.42%. With that, I will stop and turn the call back over to Eric.

Thank you, Jim. SJW Group continues to execute 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. As Jim just mentioned, We have already invested approximately 20% of our plan 2021 capital spending through the end of the first quarter. We have high quality water systems throughout our service areas and are investing to sustain them for the benefit of customers, communities, and shareholders. Other regulatory developments in the first quarter include the filing of general rate cases for both San Jose water and Connecticut water in January. 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 System. New rates are expected to be effective in the first quarter of 2022. California employs a future test year. and thus the level of capital spend is authorized during each general rate case cycle. Connecticut, Texas, and Maine employ a historical test year, where capital investments not otherwise recoverable through surcharge mechanisms and expenses are recovered in subsequent general rate case filings after they have been incurred. Connecticut Waters general rate case is the first since their last decision in 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, or PURA, is expected to issue a decision in the third quarter. The Connecticut water rate case also includes tiered rates for residential customers that promote water conservations. In Connecticut, Pura regulated water utilities are able to collect their authorized revenues, regardless of usage, through the Water Revenue Adjustment Mechanism, which mitigates risks of such a rate design and supports state policy goals for conservation. A 1.1% increase in the Water Infrastructure and Conservation Adjustment Surcharge, or WICA, was authorized by Pura earlier this year and went into effect on April 1st. This covers $8.7 million in qualified infrastructure investments that have been completed and will provide incremental annual revenue of about $1 million. The current cumulative WCAG surcharge will be rolled into base rates, and the surcharge will be reset to zero as part of the general rate case. Mainwater filed a general rate case application for its Biddeford-Saco rate division requesting a $6.7 million increase in annual revenues with the Maine Public Utilities Commission, or MPUC, in March. The application is driven by a $60 million replacement of the 1884 vintage drinking water treatment plant. Maine Waters' application includes an innovative proposal that would spread the increase over three years in roughly equal amounts. A decision on the rate smoothing mechanism To authorize a customer surcharge starting in the third quarter of 2021 is expected in the second quarter, and a decision on the requested revenue increase is expected in the second quarter of 2022, in alignment with the completion of the new water treatment facility. These various state regulatory filings include capital investments that, over the long term, benefit customers, communities, and shareholders as they enhance our ability to deliver safe, high quality and reliable water service while increasing rate base, the earnings engine for the company. We are mindful of the economic impact that COVID has had on some of our customers over the past year. Connecticut Water is proposing a 15% discount on water bills for income eligible customers that is similar to a program offered by San Jose Water since late 2005. Meanwhile, San Jose Water anticipates proposing a debt forgiveness plan for its water rate assistance plan, or WRAP, for low-income customers. The proposal includes tracking the forgiven amount in San Jose Water's WRAP balancing account for potential future recovery. On April 9th, SJWTX, our Texas water and wastewater utility, executed the closing agreement to acquire the Clearwater Estates water system. This is the first acquisition completed by a regulated water utility under the state's new fair market value regulation. The acquisition added 230 new customers, gained additional water supplies to serve current and future customers, and added rate base that reflects market value for future rate-making purposes. More importantly, the acquisition demonstrated that the fair market value process worked as envisioned. This was the 13th acquisition completed by SJWTX, which has tripled its customer base since 2006. The company serves two of the top four fastest growing counties in the United States. With a diverse portfolio of water supplies and continued additions to customer base through organic growth and acquisitions, we remain optimistic about the prospects for SJWTX and its increased contributions to consolidated earnings. We are committed to investing in our culture, diversity, and the environment. Our Diversity, Equity, and Inclusion Council has honestly and authentically guided our commitment to further build on our diverse and inclusive culture. We strive to foster an environment where all of our employees, present and future, are welcomed and comfortable being their true selves at work. We have goals to expand our supplier diversity programs so we can extend our efforts into the broader community. At the board level, SJW Group is just one of 154 companies in the Russell 3000 to achieve a gender balance board rating in 2020, according to the 50-50 Women on Boards Gender Diversity Index. We've set the foundation for creating a comprehensive greenhouse gas inventory across all of our operations. Understanding where we are now will allow us to set meaningful reduction goals for the future and develop prudent plans that will serve as a roadmap to achieve those goals. Finally, I would like to thank Bob VanValer for his 15 years of dedicated service to the company. Bob has served as a director of the company since 2006 and as lead independent director since 2015. Bob's knowledge of the water industry is second to none and his contributions to our company and stockholders are too long to list. Moreover, you won't find a person in business with more integrity, character, and a genuine commitment to serve our company, customers, employees, and communities than Bob. On behalf of the board and all of our employees, we wish him the very best. With that, I'd like to turn the call back to the operator for questions.

Thank you, and as a reminder, to ask a question, you will need to press star 1 on your telephone. And to withdraw your question, just press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Richard Sunderland from J.P. Morgan. Sir, your line is open.

Hi, good morning. Thanks for taking my question today. Yes, good morning, Richard. Turning to California GRC, you know, just curious if you could speak more to the guardrails on the supply in rates, thinking about, you know, kind of the range of outcomes possible. Is this something we should think about in terms of, you know, resetting supply mix to more recent trends, or are there other ways to address the volatility and recent low supply that you've been realizing? Sure.

Yeah, thank you, Richard. I'll start and then I'll see if my colleagues have anything to add. Richard, really the timing is ideal from that standpoint. Obviously, we are just about to start the actual hearings in our California general rate case. And with the experience of the last two years, it will be very compelling evidence to support our proposal to reduce the mix of company-owned surface water supply in our overall cost structure. So we have put together, I think, a very dynamic presentation for the commission and the public advocate staff to review. It shows a significant decrease in the surface water, company-owned surface water benefit within the rate design. And so, you know, we'll have to get into hearings and support that. But clearly the last two years provide real-time evidence that a reduction in that mix is called for. And, of course, with the state's overall situation where 95% of the state, you know, is in anywhere from a moderate to an extreme drought condition, I think it provides further support for making that adjustment. Conversely, I'm really pleased with the balance of our supply situation. The groundwater table is strong, and there's no indication there that we would need to ask for any mandatory conservation. So we have the water, but just in our purchase water and in our well portfolio, groundwater supply portfolio. Andy or Jim, anything to add to that?

I think, Eric, the only thing I would – excuse me. Go ahead, Jim.

No, go ahead, Andy.

The only thing I would add is, you know, when we see a return to wetter weather with our upgraded treatment plant, we're poised to capture sort of a larger fraction of what hits the ground because of our advanced treatment capabilities. So we think in the long run that investment is going to pay off. But right now we're working towards those lower forecasts.

And then lastly, Richard, the only thing I would say is that we are also – about to begin the process for our cost of capital proceeding. And certainly, in our request for our authorized ROE, we have highlighted the incremental risk that the element of surface water has within our surface water supply.

Thank you, Rick.

Appreciate the call there. Just actually following up real quick on the cost of capital point. So, you know, this sort of volatility from supply is, I guess, inherent in the rate structure, and as you pointed out, is something you intend to highlight within the parameters of cost of capital. Do you have any sense on... you know, how that has played out in prior cost of capital proceedings, particularly the last round versus, you know, making the argument now is certainly the recent history has highlighted this more so over the past two years, so it seems front of mind, but just curious if you can provide any high-level color on prior conversations here.

Yeah, I'd be happy to do that. Jim, why don't you start, and then I'll supplement your answer there. Perfect.

So, Richard, what's kind of interesting is if you take a look at the cost of the water supply, the cost to replace the surface water, it's gone up significantly over the past five to ten years. And it's only been in the recent four or five-year period where we've seen some significant variations in terms of the cost of our water supply. as a result of that and the precipitation variances that we've seen coming out of the watershed. So, it's really come to the forefront now. We've not included water supply in the past, to my knowledge, as an influencer, if you will, on our requested ROE. But, you know, we certainly are discussing doing so in this upcoming proceeding.

Yeah, spot on, Jim. I don't have anything to add to that. Thank you, Richard. Any other questions from you?

No, that's great. Thank you very much for the time today.

Yeah. Thank you, Richard. Really appreciate your interest.

Thank you. Our next question comes from the line of Angie Staronsky from Seaport Global. Naomi, your line is open.

Thank you. So, okay, I mean – The guidance looks bad, even against, I think, low expectations. And I understand the incremental cost for purchased water. So I'm just wondering if there are any credit implications that you might see this year on the back of those low earnings and those low cash flows that you expect?

Angie, thanks for the question. Jim?

Yeah, you know, Angie, I don't think so. I believe that, you know, most of our creditors look at the company's ability to go in and recalibrate within a three-year period within a rate case. And I think they'll understand that we're at the forefront of our next rate case and have an opportunity to address the situation as we go in. I would expect there to be more of a long view. in that regard, as opposed to just what has happened this and in the prior year.

Okay. And then looking at year-over-year changes in usage patterns, I mean, I understand that COVID-related restrictions are sort of subsiding, or so we hope. But are you still seeing the elevated residential usage? And is that help that you guys had, especially in the third and fourth quarter of last year, did you embed it in your guidance for 21?

So, Eric, I'll take that. So, Angie, if you take a look at the real weather influence in 2020, That's where we've benefited significantly. There was more of an offset, if you will, last year with regards to COVID between our usage at the residential level and our usage in business in terms of a drop-off in business and an increase in residential. We're actually starting to see business return a little bit, which is very encouraging, especially in California where we don't have any decoupling mechanism in place. And so, you know, when we set the guidance, we set it assuming a somewhat of a return to normal usage through a balance between what we will experience in our residential and what we would experience in our business usage customers.

So what happens – I'm debating this myself – If there are any sort of local restrictions or conservation calls, given how dry it is, especially in Northern California, how would that impact that range? And again, I appreciate the fact that the hotter-than-normal weather helped to drive the, I forget, 10 or 15 cents variance last year versus your guidance. And I'm just basically wondering if conservation was being imposed, if it could actually go the other way.

Sure. I'll take that first, Jim. So, you know, the very conditions that have reduced our surface water benefit can drive higher sales, right? So if we continue to have, you know, above average temperatures through the year and no additional rainfall, it's reasonable to expect that we'll see some increased usage across the state of California and through our service territory. If no drought is declared with attendant mandatory conservation, then I would expect to see our sales and production levels increase accordingly. If a drought is declared and there is mandatory conservation required, then we have protection requirements. on the downside through the WCMA application with the California PUC. But we wouldn't enjoy, you know, additional upside if customers complied with that request. So I think those are kind of the railings, if you will, Angie, that I see.

Okay. And then lastly, the tending to your fee. Okay. you haven't changed your expected cell production volumes, right? That 1.8 billion gallons still stands, which is obviously meaningfully higher than what you realized in 2020 and what you will realize in 2021. So why wouldn't you basically attempt to modify that expectation going forward? And I understand that these are two particularly dry years, but again, I mean, you have a chance to in a sense, protect yourself in this filing against similar outcomes from an earnings perspective as we see now in two years in a row?

Yeah, of course. Remember, the case was filed back in December and January, so before the end of this rainy season. So we will have the opportunity to update our evidence and have discussions with the public advocate and with the commission and put forth the strongest case supported by you know, not just one years of experience, but you do, to maintain some credibility here, you have to look back over a reasonable period of time as well. So we're going to do all that we can to make sure that we balance the risk and the benefits here, because surface water can be a substantial benefit, as we saw as recently as 2019, where we had, you know, over 5 billion gallons of water that we could use. And so we want to balance the risk and the benefit here and put forth a strong It's wrong case to do that. So we're updating our information, Angie.

Okay. And lastly, I mean, I know that the Connecticut raid case is still pending, but is there any comments you can offer as to potential settlements, you know, contentious points thus far in the process?

You know, we recently completed the first round of hearings over there. Our team – being reported that, you know, felt like that process went well, that, you know, there was a real interest on all, you know, by all parties to make sure that they understood the facts and the evidence and the like. There wasn't any tone or tenor that caused us any concern. I'd say, you know, the big discussion is on the cost of capital, that, you know, that's It's been quite some time since our last rate case there, and so my understanding there was a considerable amount of time spent on that testimony from our witness as well as from the Consumer Council's witness. But I wouldn't describe it as contentious. It was just a lot of attention paid to that particular point.

And I'm sorry, I forgot to ask about the cost of capital in California given the upcoming filing. So you know, given the experience of the last two years, will you try to ask for some sort of an ROE adder, you know, given the volatility in earnings you're experiencing for TANHOGA Water?

Yes, we're discussing that. We haven't filed our information yet, of course, but I think we can make a clear case for, you know, as a result of that volatility, that that needs to be addressed in our cost of capital. So, So we're planning a multi-pronged approach here in our general rate case and our cost of capital proceeding and, you know, as well working with our wholesaler and the like to address this issue. Great. Thank you. Thank you, Angie.

Thank you. Our next question comes from the line of Hazan Doza from Water Asset Management. Sure, your line is open.

Hi. Good morning, gentlemen. I just wanted to understand a couple of your underlying assumptions a little better. First, on the total water available, you know, last year you mentioned that the total water available in your California watershed was between 1 billion to 1.2 billion gallons. That was last year. So my first question is, how much in billions of gallons do you have right now in your watershed absent and any additional rainfall.

Sure. Andy, you want to provide that?

Yeah, I'd be happy to. Unfortunately, we have very little impounded and outside of, you know, some environmental pools we need to maintain for wildlife, we have about 150 million gallons available to treat.

So then what is the current surface water level at Lake Ellsman, roughly?

So it's about double that. So we need to leave an environmental pool of about 150 million. So we have just under 300 million gallons in the reservoir at this time.

Got it. So basically, essentially zero. So you'll be essentially buying historically what you had from Lake Ellsman into – purchase water. And I just wanted to find out because last year, I think you gave very specific amount of water you'd be buying. So in terms of billions of gallons, how much purchase water do you assume you will be buying in 2021 in billions of gallons?

Jim, do you have that information or at least the incremental portion over the surface water benefit?

Yeah, I think I'll take that, Eric. So effectively, we had baked in about 2.5 billion gallons to our original thought process as we were looking at 2021, which is in line with what was in our rate case as well as, you know, closer to the average over an extended period. So we, for the year, will be buying incrementally about 2 billion gallons.

So in total, you'll be buying like 4.5 billion gallons of purchased water?

Well, again, we purchase a lot of water from the Santa Clara Valley Water District, and I believe about 50% thereabouts of our total supplies are purchased and 40% are pumped, from which we pay a pump tax. So all we're really talking about right here, Hansa, is the incremental piece.

Yeah, that's what I mean. The water that you're not getting from Lake Ellsman, you're buying. And I just wanted to understand, is that incremental purchase, is that basically 4.5 billion gallons or is that a different number? No, it would be 2 billion gallons. 2 billion gallons, okay. And Jim, a follow-up question for you on the tax rate. In terms of the tax rate for Q2 and remainder of the year, should we assume a more normalized tax rate? How do you kind of think about that?

Yeah, I would assume a more normalized tax rate. We typically in the first quarter, that's our lowest income producing quarter. And at the same time, it's when we are able to recognize tax credits, for example, for equity awards that are issued in the first quarter related to the prior year. And so there's a kind of a disproportionate amount of tax credits that we receive. in that quarter. It will average out over the remainder of the year towards a more normal rate.

And I just wanted to ask one closing question for Eric in Connecticut. Eric, given your background in the state, I'm sure you saw yesterday the Connecticut Commission on a different proceeding for Connecticut Light and Power. dealing with the hurricanes in that state lowered the ROE on a punitive basis for Connecticut Light and Power by about 90 basis points. So I just wanted to get your thoughts in terms of the risk on the ROE in your rate case given now that the Connecticut Light and Power ROE is closer to 8.3%. So how do you kind of think about the risk in the ROE in Connecticut in light of yesterday's Thanks, Hassan.

Yeah, I would completely decouple the events. You know, the issue involving the electric utility you mentioned, I can recall four incidents in my time associated with Connecticut where our operations were without power, some for as long as a week or more. And so, you know, my read of that situation was that Pura had had enough and decided to implement a penalty on the ROE or increase it. And also, if you look back, the track record with ROEs for water has been higher than the electrics, and I believe that that is rooted in the view that water utilities are more of an environmental utility and that attracting and supporting capital investment in water is very important and is part of protecting and preserving that natural resource. So if anything, I feel like, you know, the Connecticut regulators really understand, you know, the primacy of drinking water investments. Thanks, Hasan, for your questions today.

Thank you. Our next question comes from the line of Jonathan Reeder from Wells Fargo. Sir, your line is open.

Hey, good morning. A lot of my questions have kind of been asked. If I can just take the previous discussion a step further, trying to reconcile the guidance with what it would have looked like, you know, had you had that $2.5 billion. So, Jim, you said, you know, $2 billion. of incremental purchased water, and that's at that $4.2 million cost per billion gallons. What kind of tax rate should we, I guess, kind of be applying to that?

Yeah, I think, you know, our tax rate is typically, you know, between 15 and 20%, depending upon the discrete items that we're able to work through the tax provision in any one year. So I would focus on a range within that span.

Okay. All right. That's helpful. And then I may have missed you specifically addressing it earlier in the Q&A, but any sense how your request to lower the 2.5 billion gallons of surface water in the pending GRC is being received by intervenors? You know, is that $1.8 billion being viewed as reasonable? And, you know, I know you're saying that they look at, you know, more of a five to ten year kind of window. Is the 1.8 being viewed as, you know, reasonable or is there pushback still to that?

You know, I'll take that, Jim. I wouldn't comment on it today, Jonathan. You know, it's very early in the process and what I would say is, you know, certainly the experience in the last two years really puts an exclamation mark on it. So, So I feel confident that we have a very strong case for modifying significantly the surface water, company-owned surface water benefit in our rate design. More to come.

Okay, great. And then in Maine, in that rate case, if that rate smoothing tariff is adopted, will you recognize the revenue as it's collected or, you know, would the rate increase not be, you know, flowed through the financials? until after the rate decision is received in Q2 2022. Is that more cash flow versus an actual earnings perspective?

Yeah, thanks, Jonathan. Jim, do you have that one?

Yeah, Jonathan, it's more a cash flow issue. It's more easing in the incremental rate increase over a period of time and lessening the shock to the rate payers there. But we would not be recognizing that as revenue until – the asset is put in – basically, the plan is put in service, and we're entitled to begin charging a higher amount for that asset.

Okay. And then last, I know we've already danced around it, but the cost of capital. I know Cal Water indicated they plan to request a 1035 and no change in their authorized capital structure. in their slide deck today. Any kind of preview you're willing to provide, you know, even if it's not on the ROE, at least cap structure?

Yeah, we're still finalizing that, Jonathan, so it would be a little premature for me to talk about that at this point.

Okay, got it. No, appreciate all the details provided in the Q&A. It's been helpful.

Thank you, Jonathan.

Thank you. There are no further questions on the queue. Presenters, please continue.

Very good. Thank you so much, operator, and thank you, folks, for joining our call today. We will keep you posted, and we appreciate your support and interest in the SJW group. Thank you very much.

This concludes today's conference call. Thank you for participating.