H2O America (HTO) Q1 2021 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the SJW Group Q1 2021 Financial Results Conference call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] 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 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. [Operator Instructions] 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 work sites, 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. A 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 Elsman reservoir for release later in the year. For the first time in my 25 years at San Jose Water, we are temporarily taking our Montevina 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 Elsman 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 1 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 purchased water has 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 $0.08 per share, cumulative cost savings of $0.04 per share, a tax benefit of $0.04 per share and an increase in nonregulated income of $0.03 per share. The diluted per share increase was partially offset by a decrease in customer usage of $0.08 per share. Customer credits in Texas totaling $0.02 per share issued in connection with the February Ice storm, a decrease in the availability of surface water of $0.02 per share and an increase in depreciation and amortization of $0.06 per share. Our 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 cost 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 31, 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 plant during the first quarter of 2021. This represents 20% of our total 2021 planned 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 noncash 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 Tax 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 agreement replaced the existing JPMorgan Chase credit agreements, which have been paid off and were set to mature and expire on June 1, 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 planned 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 Water's 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. Connecticut Water rate case also includes tiered rates for residential customers that promote water conservation. In Connecticut, PURA-regulated water utilities are able to collect their authorized revenues regardless of usage through the water revenue adjustment mechanism, which mitigates risk of such a rate design and support 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 1. 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 WICA surcharge will be rolled into base rates, and the surcharge will be reset to 0 as part of the general rate case. Maine Water 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 PUC, in March. The application is driven by a $60 million replacement of the 1,884 vintage drinking water treatment plant. Maine Water's application includes an innovative proposal that would spread the increase over 3 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, or low-income -- 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 9, SJWTX, our Texas Water and Wastewater Utility, executed the closing agreement to acquire the Clear Water Estates Water System. This is the first acquisition completed by a regulated water utility under the state's new fair value -- 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 2 of the top 4 fastest-growing counties in the United States. With a diverse portfolio of letter 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 1 of 154 companies in the Russell 3000 to achieve a gender balanced 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 road map to achieve those goals. Finally, I would like to thank Bob Van Valer 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.

[Operator Instructions] Our first question comes from the line of Richard Sunderland with JPMorgan.

Turning to the California GRC. Just curious if you could speak more to the guardrails on the supply in rates, thinking about kind of the range of outcomes possible. Is this something we should think about in terms of 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?

Yes. 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 our -- the actual hearings in our California general rate case. And with the experience of the last 2 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 we'll have to get into hearings and support that. But clearly, the last 2 years provide real-time evidence that a reduction in that mix is called for. So -- and of course, with the state's overall situation, where 95% of the state 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 is no indication there that we would need to ask for mandatory considerations. So we have the water, but just in our purchased water and our well portfolio -- groundwater supply portfolio. Andy or Jim, anything to add to that?

I think the only thing I would -- excuse me, go ahead, Jim.

No, go ahead, Andy.

The only thing I would add is, 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 capability. 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.

Great. I appreciate the color there. Just actually following up real quick on the cost of capital point. So this sort of volatility from supply is -- gets 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 how that has played out in prior cost of capital proceedings, particularly the last round versus making the argument now is certainly, the recent history has highlighted this more so over the past 2 years. So it seems front of mind, but just curious if you can provide any high-level color on prior conversations here.

Yes, 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 5 to 10 years. And it's only been in the recent 4 or 5-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 we certainly are discussing doing so in this upcoming proceeding.

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

No, that's great.

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

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 the low cash flows that you expect?

Angie, thanks for the question. Jim?

Yes. Angie, I don't think so. I believe that most of our creditors look at the company's ability to go in and recalibrate within a 3-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 gave 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 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 was very encouraging, especially in California where we don't have any decoupling mechanism in place. And so 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 customer -- customers.

So what happens -- I'm debating this myself. So 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, $0.10 or $0.15 variance last year versus your guidance. And I'm just basically wondering if conservation were to be imposed, if it's actually -- if it could actually go the other way?

Sure. I'll take that first, Jim. So the very conditions that have reduced our surface water benefit can drive higher sales, right? So if we continue to have 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 on the downside through the WCMA application with the California PUC. But we wouldn't enjoy 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 pending GRC. So you haven't changed your expected production -- self-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 you should basically attempt to modify that expectation going forward? And I understand that these are 2 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 2 years in a row.

Yes. 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 not just 1 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 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 case to do that. So we're updating our information, Angie.

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

We've recently completed the first round of hearings over there. Our team reported that -- felt like that process went well that there was a real interest on all -- 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, the big discussion is on the cost of capital 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 counsels witness. So -- 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 given the experience of the last 2 years, will you try to ask for some sort of an ROE adder, given the volatility in earnings you're experiencing for San Jose Water?

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

Our next question comes from the line of Hasan Doza from Water Asset Management.

I just wanted to understand a couple of your underlying assumptions a little better. First, on the total water available. 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 any additional rainfall?

Sure. Andy, you want to provide that?

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

So -- and what is the -- then what is the current surface water level at Lake Elsman 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, it's 0. So you'll be essentially buying what -- historically, what you had from Lake Elsman into purchased 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 -- yes, the surface water benefit?

Yes. 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 closer to the average over an extended period. So we -- for the year, we'll 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 purchased 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, Hasan, is the incremental piece.

Yes, that's what I mean. The water that you're not getting from Lake Elsman, you were 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, do you -- should we assume a more normalized tax rate? How do you kind of think about that?

Yes. 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 is this kind of a disproportionate amount of tax credits that we received in that quarter. It will average out over the remainder of the year towards a more normal rate.

Okay. 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 late yesterday the Connecticut Commission on a different proceeding, Connecticut Light and Power, dealing with the hurricanes in that state, lowered the ROE on a cumulative 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 ruling?

Thanks, Hassan. Yes, I would completely decouple the events. The issue involving the electric utility you mentioned, I can recall 4 incidents in my time associated with Connecticut, where our operations were without power, some for as long as a week or more. And so 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 the Connecticut regulators really understand the primacy of drinking water investments. Thanks, Hasan, for your questions today.

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

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 had you had that 2.5 billion. So Jim, you said 2 billion of incremental purchased water, and that $4.2 million cost per billion gallons. What kind of tax rate should we, I guess, kind of be applying to that?

Yes. I think our tax rate is typically between 15% and 20%, depending upon the discrete items that we are 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 you request to lower the 2.5 billion gallons of surface water, and pending GRC is being received by intervenors. Is that 1.8 billion being viewed as reasonable? And I know you're saying that they look at more of a 5 to 10-year kind of window. Is the 1.8 billion being viewed as reasonable? Or is there pushback still to that?

I'll take that, Jim. I wouldn't comment on it today, Jonathan. It's very early in the process. And what I would say is, certainly, the experience in the last 2 years really puts an exclamation mark on it. 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 would the rate increase not be flowed through the financials until after the rate decision is received in Q2 2022? Is that more cash flow versus an actual earnings perspective?

Yes. Thanks, Jonathan. Jim, you have that one?

Yes. 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 and water indicated, they plan to request a [10/35] and no change in their authorized capital structure in their slide deck today. Any kind of preview you're willing to provide, even if it's not on the ROE at least cap structure?

Yes. We're still finalizing that, Jonathan. So it would be a little premature for me to talk about that at this point.

There are no further questions in 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. You may now disconnect.