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Q3 2023 SJW Group Earnings Call

Participants

Andrew F. Walters; CFO & Treasurer; SJW Group

Eric W. Thornburg; Chairman, President & CEO; SJW Group

Agnieszka Anna Storozynski; Research Analyst; Seaport Research Partners

Gregg Gillander Orrill; Executive Director & Equity Research Analyst of Utilities; UBS Investment Bank, Research Division

Jonathan Garrett Reeder; Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division

Richard Wallace Sunderland; Associate; JPMorgan Chase & Co, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the SJW Group Third Quarter 2023 Financial Results Call. At this time, all participants are in 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 like now to turn the conference over to Andrew Walters, Chief Financial Officer and Treasurer. Please go ahead.

Andrew F. Walters

Thank you, operator. Welcome to the third quarter 2023 financial results conference call for SJW Group. I will be presenting today with Eric Thornburg, Chair of the Board, President and Chief Executive Officer. For those who would like to follow along, slides accompanying our remarks are available on our website at sjwgroup.com.

Before we begin today, I would like to remind you that this presentation and related materials posted on our website may contain forward-looking statements. These statements are based on estimates and assumptions made by the company in light of its experience, historical trends, current conditions and expected future results, as well as other factors that the company believes are appropriate under the circumstances.

Many factors could cause the company's actual results and performance to differ materially from those expressed or implied by the forward-looking statements. For a description of some of the factors that could cause actual results to be different from statements in this presentation, we refer you to the financial results press release and our most recent Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission, copies of which may be obtained on our website.

All forward-looking statements are made as of today, and SJW Group disclaims any duty to update or revise such statements. You will have the opportunity to ask questions at the end of the presentation. And as a reminder, this webcast is being recorded, and an archive of the webcast will be available until January 22, 2024. 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 W. Thornburg

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. As we progress through the second half of 2023, I'm pleased to report that the strong momentum of the first half of the year continues. We remain focused on advancing our strategy. And in this quarter, we were able to achieve important milestones towards this goal. These include securing constructive regulatory outcomes across our local operations, such as an increase in the water infrastructure and conservation adjustment in Connecticut and the approval of the reimplementation of the Water Conservation Memorandum Account in California. Achieving 12% customer growth year-over-year in Texas.

Since 2007, Texas Water has more than quadrupled its number of customers serving more than 28,000 connections today, investing $196 million in water and wastewater utility infrastructure year-to-date through the end of the third quarter or 77% of our $255 million 2023 capital expenditure plan, which includes solar energy investments that lower operating costs and reduced greenhouse gas emissions and delivering earnings per diluted share of $1.13 in the third quarter and $2.09 year-to-date. I'm pleased to share that our successful execution of our growth strategy, together with the implementation of initiatives to address anticipated challenges as well as partial usage recovery in California and Texas have allowed us to increase our 2023 guidance range to $2.65 to $2.70 of net income per diluted share.

Before we go on, I would like to take a moment to comment on the reimplementation of the WCMA, which was approved earlier this month. The California Public Utilities Commission recognized the ongoing water supply challenges in the San Jose area, when it authorized the reimplementation of the WCMA and WCEMA to include the voluntary water conservation request of our water wholesaler Valley Water. Rainfall in 2023 has been plentiful by California standards, but challenges continue in Santa Clara County. Valley Water's largest reservoir is at less than 3% of its storage capacity and will be for 10 years as the dam has strengthened against earthquakes. Maintaining the momentum that our customers have made in water conservation during recent droughts will serve us all well in the future.

As we move towards the end of 2023 and into the new year, we will continue to execute on the key elements of our growth strategy. We expect future earnings growth will be driven by our commitment to managing operating expenses, continued investment in maintaining and improving our water supply and infrastructure as well as constructive regulatory outcomes across our operations, including the California Water Cost of Capital Mechanism, system improvement charge in Texas and general rate cases and infrastructure investment surcharges in Connecticut and Maine, all of which we will discuss during this call.

For now, Andrew will review our financial results and regulatory updates in our state operations. Andrew?

Andrew F. Walters

Thank you, Eric. This morning, prior to the market opening, we released our third quarter 2023 operating results. The quarter-over-quarter comparisons between 2023 and 2022, operating results are affected by and reflect the delay in San Jose Water Company's 2022 to 2024 General Rate Case decision. As a reminder, while the California Public Utilities Commission approved the settlement agreement and San Jose Water recorded the authorized revenue increase from the general rate case in the fourth quarter of 2022, the revenue increase was retroactive back to January 1, 2022. This delay in recognizing the revenues authorized in the general rate case affects the quarter-over-quarter comparisons through 2023.

In the third quarter, we reported revenue of $204.8 million and net income of $36.2 million or diluted EPS of $1.13 per share. This compares to 2022 quarterly revenue of $176 million, reflecting a 16% increase and net income of $25 million, reflecting a 45% increase or diluted EPS of $0.82 per share, reflecting a 30% increase. Operating results for the third quarter were affected by weather conditions across multiple operations with parcel demand recovery in California and Texas.

In California, the end of the declared drought emergency and mandatory conservation ended our use of certain revenue protection mechanisms on April 11, 2023. As noted by Eric earlier, San Jose Water Company was notified in early October that the CPUC has approved our request to reimplement the temporary regulatory revenue protection mechanisms the WCMA and WCEMA that were in place during the declared drought emergency. The use of these mechanisms is retroactive back to April 20, 2023. The benefit of the restored revenue protection mechanisms will not be reflected in operating results until the fourth quarter. I will discuss in greater detail shortly.

We continue to see reduced water usage in Maine due to wet weather and lower industrial usage, while in California, Texas, demand partially recovered in the third quarter. In Connecticut, revenues were not impacted by increases or decreases in water usage because of the water revenue adjustment mechanism. As you can see, the quarter-over-quarter increase in diluted earnings per share for Q3 2023 was primarily driven by rate filings of $0.62 per share, which I'll break down for you shortly and $0.19 related to higher water usage, partially driven by end of the mandatory water conservation in California. Partially offsetting the quarter-over-quarter increase was a $0.21 per share increase in water supply costs, $0.12 in income tax expense and $0.09 in regulatory mechanisms as well as increased interest expense.

Now a breakdown of the increase in revenue compared to the third quarter of 2022. The revenue increase was mostly driven by $22.6 million in cumulative rate filings and $8.3 million due to higher usage. The total includes California's third quarter 2023 revenue increase in the 2022 portion of the general rate case that was approved in Q4 2022. Water infrastructure and conservation adjustment increase in Connecticut that was effective in Q2 2023 and a temporary rate increase authorized in May in Q3 of 2023. The revenue increase was partially offset by a $3.2 million decrease in regulatory mechanism adjustments primarily from the end of the drought declaration in California. There was a slight increase in water production expense when compared to the third quarter of 2022. The increase was largely driven by $10 million in water supply costs, primarily related to a rate increase from our water supply wholesaler and a $1.4 million due to the higher customer usage. Partially offsetting the increased expenses was $2.4 million decrease from surface water mix and regulatory adjustments.

The 1% increase in total other operating expenses compared to our prior year was primarily driven by depreciation and amortization and other than income taxes. The increase was partially offset by reduced expenses. A significant portion of this reduction is due to San Jose Water Company's continued focus on the maturity of the advanced asset management program, which includes condition monitoring and assessments, proactive planned asset replacement versus a run-to-failure approach and early detection technologies. Additionally, advances in Santos Water Company's leak detection technology deployed in the field as well as advanced leak detection capabilities of field crews have enabled the company to detect and repair lakes sooner, avoiding significant costs associated with larger emergency main breaks in the distribution system.

As mentioned earlier in the call, the benefit of the restored revenue protection from the WCMA and WCEMA mechanisms is not reflected in our financial reporting from April 11 through September 30, 2023. Year-to-date, we reported revenue of $499 million and net income of $66 million or diluted EPS of $2.09 per share. This compares to 2022 year-to-date revenue of $449.3 million, reflecting an 11% increase and net income of $40.3 million, reflecting a 64% increase. Our diluted EPS of $1.33 per share, reflecting a 57% increase. As you can see, the year-to-date increase in diluted earnings per share for 2023 was primarily driven by rate filings of $1.52 per share in California and Maine and a like increase in Connecticut that were approved after the third quarter of 2022. There were also increases due to the release of income tax reserves and a onetime true-up of our Cupertino concession that occurred in 2022. Partially offsetting the increase was higher water supply cost of $0.60 per share, interest expense of $0.19 and nonrecurring $0.15 gain on the sale of nonutility property in the year-to-date 2022.

Approximately $77 million has been raised in the first 9 months through our at-the-market program. $50 million is for general corporate purposes and the additional amount was raised for acquisitions that closed in the third quarter. At the end of the quarter, we had approximately $222 million available and approximately $128 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 the first 9 months was approximately 6.16%. The average borrowing rate for the same period in 2022 was approximately 2.79%. The effective consolidated tax rate for the first 9 months ended September 30, 2023, and 2022 were approximately 6% and 8%, respectively.

A 2024 WCCM adjustment was triggered on September 30, 2023, which will be effective in January. The return on equity adjustment will be 70 basis points, and the implementation will be handled through the advice letter process. On October 13, 2023, San Jose Water filed the letter #601 to trigger the 2024 WCCM. The company expects to file a separate advice letter on or about December 1 to implement new rates that reflect a WCCM adjusted return on equity of 10.1%, less a 20 basis point reduction due to the restoration of the Water Conservation Memorandum Account for a projected ROE of 9.81%.

I will discuss the WCMA and WCEMA more in a moment. The advice letter also proposes a 2 basis point increase in the cost of debt to 5.28% and an overall rate of return of 7.86% effective January 1, 2024. On October 2, 2023, the CPUC authorized the reimplementation of the WCMA and WCEMA retroactive to April 20, 2023. As of April 11, 2023, SJW Water Company has no longer afforded the revenue protections of the WCMA and WCEMA, which were in place to offset both revenue and expenses, impacts of lower water usage from the mandatory conservation measures.

With these retroactive implementations, San Jose Water will enjoy essentially uninterrupted benefits from these mechanisms. The approved continuation of the WCMA also involves a retroactive reimplementation of a temporary 20 basis point reduction in the ROE when the WCMA is in effect. The estimated amount not yet recorded an after-tax earnings is $2.7 million. As of September 30, 2023, we have and will continue to offset the lost revenues from conservation to this balance, which reflects the balance of the drought surcharges collected during the mandatory conservation period that ended April 11 until it is exhausted. Doing so provides immediate recovery of lost revenues resulting from conservation.

As noted by Eric, earlier, the CPUC agreed with our position that temporary revenue protection mechanisms were warranted because of the 15% voluntary water use reduction goal established by our water wholesaler based on continuing water shortage or water storage restrictions and precipitation variability. The CPUC's decision on the WCMA and WCEMA is a win for our customers, the company and the environment. It gives us the opportunity to maintain our meaningful water conservation programs while encouraging customers to make conservation a way of life, helping reduce and stabilize water bills and supporting sustainability, as well as water supply given the reduced local storage.

Our regulatory affairs team worked with the CPUC to address the inherent challenges in predicting the supply mix at San Jose Water Company and fortune approach that protects customers and shareholders from the cycle of droughts in California. The CPUC's authorization of the full cost balancing account is retroactive to January 1, 2022, because of the delayed general rate case. Our customers continue to experience the benefit of the full cost balancing account for water supply mix. The plentiful precipitation during the rainy season that continued into the spring resulted in higher-than-normal availability of our own surface water supply. The increased production from our own supply benefits customers because it replaces the higher cost supplies from our wholesaler that's imputed in our water rates. The resulting reduction in overall water production costs from our increased owned supply flows back to customers. The full cost balancing account tracks actual versus authorized water supply and purchase power costs and eliminates the supply mix volatility that has impacted past earnings. Customers benefit when there is greater surface water availability and the company is protected when there is less availability. We saw the benefit for the full year 2022 when San Jose Water Company was able to book $2 million in revenue losses to this account.

In 2023, the full cost balancing account balance through third quarter of 2023 as a result of the greater surface water availability was an overcollection of $9.9 million providing benefits to customers. In Connecticut, on October 3, 2023, we filed a general rate case application with the Connecticut Public Utilities Regulatory Authority for a $21.4 million or 18.1% increase in annual revenues. Approximately 2/3 of the requested rate increase is related to infrastructure investment. The application is also a proposal for expanding our low-income water rate assistance program for eligible customers. Connecticut Water has offered a 15% discount on water bills through the RAP program since 2021 and was the first water utility in the state to offer this type of program. Under statute, PURA has 270 days to issue a decision on our request. We expect any approved rate increase to be effective on or about July 1, 2024. On September 25, 2023, PURA approved our request for a 1.19% increase in the Water Infrastructure and Conservation adjustment effective October 1, 2023. The increase will generate $1.3 million in annualized revenues. On August 25, the main Public Utilities Commission approved our request for temporary rates in the Biddeford-Saco division, which will generate $1.5 million on an annualized basis. The decision was related to our general rate case application filed last March, requesting $2.9 million increase in annualized revenues to cover the operating expenses and increased borrowing costs from constructing the new Saco River Drinking Water Resource Center.

The facility went in service last summer, a final fully litigated decision on the total 2.9 million requested increase is expected in the fourth quarter of 2023. Main Water also filed an application with the MPUC to recover $1.7 million in completed infrastructure investments in the Camden Rockland Division through the water infrastructure charge or WISC. If approved, as requested, it would generate 158,000 annualized revenues. The decision is expected in the fourth quarter of 2023. On August 14, 2023, we closed on 2 significant acquisitions in Texas. KT Water Development was acquired by the Texas Water Company. It brings 570 new residential connections. The Public Utilities Commission of Texas final order that translates the certificate of convenience and necessity to Texas Water is expected in the fourth quarter, and we also expect approval at that time of our request for fair market value and applied rate doctoring treatment.

KT Water Resources was acquired by our Texas Water Resources subsidiary, a water supply company that is not regulated by the PUCT. KT Water Resources has approximately has water resources that are expected to boost our available water supply by approximately 40% in our growing Texas service area. Engineering and design work is already underway on the necessary infrastructure investment needed to bring the critical new water supply source to our existing customers. We anticipate that customers will begin to see the full benefit of this new water supply within the next few years as the infrastructure is built out.

Over the past year, we have seen increasing developer interest in our Texas service area as outstanding development units with the potential for new connections increased from 15,000 units at the end of 2022 to 22,000 units today. That is not surprising as Texas Water currently serves 3 of the 5 fastest growing counties in the United States according to the U.S. Census Bureau. With more than 27,500 water connections and 900 wastewater connections in the area between Austin and San Antonio, the company has quadrupled its service connection since 2007, and we intend to continue this momentum through the prudent acquisitions, organic growth and securing water resources like KT Water to support that growth.

We continue to advance our application for a system improvement charge in Texas. The SIC would allow Texas Water to add certain utility plant additions made since 2020 to its rate base, thereby increasing revenue and avoiding the immediate need for a general rate case. The SIC is projected to increase Texas Water's revenue by $1.6 million within 1 year of the PUCT's approval. A decision is expected in Q1 2024. The U.S. Drought Monitor is classified our Texas service areas being in extreme to exceptional drought. We have systems in Stage 3 and some in Stage 4 drought conditions. We are targeting a voluntary 20% reduction in water use in the Stage 3 areas and a 25% reduction in target in the Stage 4 areas. Usage has been down year-to-date, but we did see a partial recovery in the third quarter.

We are updating our 2023 guidance range to $2.65 to $2.70 per share of net income. Our guidance increase is attributable to our exceptional performance in 2023, driven by several factors, including the successful implementation of initiatives to address anticipated challenges such as procurement to further leverage our combined spend and using equity to offset higher interest costs. Recovering water usage in California and Texas, when our guidance was issued, California was still under emergency drought route declaration. The partial release of an income tax reserve relating to repaired tax deductions, a year-end study to optimize expansion of the use of repair tax and the various constructive regulatory decisions that we have already discussed.

As investors consider the impact of this guidance change on the future, it's important to note that we benefited in the current year from a change in regulation to allow the company a onetime release of $0.08 related to income tax reserves. Also, we look to invest in the future growth and improved operations. We expect an impact of between $0.04 to $0.08 per diluted share for 2024. While we have not come out with 2024 guidance yet, we want to make sure that our investors are aware of these factors so that they can take them into account as they think about their earnings expectations for the company in 2024 and beyond.

Year-to-date, $77 million has been issued through ATM, an additional $5.7 million is targeted for 2023, which includes a total of $32.5 million for acquisitions. We maintain our 5-year capital investment outlook of $1.6 billion, which includes approximately $230 million in estimated PFAS remediation process based on the EPA's proposed maximum contaminant levels. We also reaffirm our long-term growth rate of 5% to 7% anchored off of 2022 diluted earnings per share of $2.43. We anticipate EPS will be nonlinear because of the rate case cycles.

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

Eric W. Thornburg

Thank you, Andrew. Well done. One of the ways we measure our growth and success as a company is being a force for good in delivering for customers, communities and the environment. As a water company, we're particularly focused on helping build a sustainable future for our communities which is why we're working hard towards our goal of reducing greenhouse gas emissions by 50% by 2030 compared to 2019.

By the end of 2023, we will have nearly 2,300 MWh of installed solar capacity across our local operations, and we estimate that by the end of 2024, our installed solar generating capacity will more than double to nearly 6,200 MWh. That's enough green energy to power nearly 600 homes in the U.S. for an entire year. Further, it will lower our operating expense, which will help us to minimize future customer rate increases. We're also being intentional about purchasing energy from renewable sources, and we are investing in infrastructure projects that will lower operating expenses. For example, in Connecticut, the interconnection of our largest water system with a smaller nearby system will produce significant savings annually and eliminate a dependency on a single source of supply. We also continue to leverage our increased purchasing scale since the CTWS acquisition through the procurement process.

Through the third quarter, we estimate approximately $320,000 in O&M savings by focusing on enterprise-wide RFPs, multiyear agreements and harnessing the expertise of a cross-functional team of leaders to develop and select suppliers. To be clear, our commitment to ESG runs deep and extends from the field to the Board and beyond our organization to vendors. We're proud that our successful environment, social and governance initiatives are being recognized, showing we're making a meaningful difference. Our rating from MSCI was recently boosted to A from BBB and our GRESB rates, our public disclosure of ESG in the upper third of our peer group. Our Connecticut utility has been recognized as a top workforce for the third consecutive year based on the feedback of our employees in an anonymous independent survey.

In California, we've been recognized by the National Association of Clean Water agencies for watershed stewardship. In Maine, our utility was recently named the Utility of the Year by the New England Water Works Association for our innovative approaches to efficiently address challenges that benefit our customers. We will continue to work towards achieving rankings that reflect our long-term commitment to our environment, customers, employees and communities.

I'm also pleased to welcome Denise Kruger to the SJW Group Board of Directors. Denise has more than 30 years of experience in the water service profession and is a recognized water industry leader. Her knowledge and experience in water supply as well as environmental and economic regulation in California will serve us well. We also welcome Aundrea Williams as President of Texas Water. She comes to Texas Water from NextEra, where she held several roles, including President of NextEra Water Texas. Her leadership qualities, her character and her extensive experience developing and executing regulatory and legislative strategies made for a fantastic addition to the team.

As I've shared before, our people are what makes the difference at SJW Group. I continue to be inspired by the contributions of our talented teams across our national footprint as they consistently provide an essential service with integrity, reliability and peace of mind for our customers. I am confident our team's commitment to serving customers, communities, the environment and shareholders will continue to propel SJW Group's ability to deliver value to our stakeholders and reinforce our strong position for a successful future.

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

Question and Answer Session

Operator

Thank you. (Operator Instructions) The first question comes from Angie Storozynski with Seaport Research.

Agnieszka Anna Storozynski

It has been very strong results. Congratulations. I'm clearly a bit surprised because strong the folks were. So maybe just taking a step back, so I understand the tax benefits. And what should we think will be the effective tax rate next year? Are we still like around, say, 10%, 12%?

Andrew F. Walters

Look, we're finalizing where it is. And the problem with projecting effective tax rate, Angie, as you know, is it depends on like discrete tax items. We have a repair tax study that's in process that we don't know the final results are until this next quarter, the quarter that we're in now. So until that comes out, I'm not really wanting to comment specifically, but I think the range that you're talking about is consistent with the range that we've demonstrated in the past. If there's times when we can fine-tune that and make that even better, we will do that.

Agnieszka Anna Storozynski

Okay. And then moving on to the WCMA, WCEMA. So I understand it's retroactive to April. But is the assumption that it expires at the end of this year? Or does it stretch -- I mean, am I going to get basically this support in '24 as well?

Andrew F. Walters

Yes. So our baseline assumption is that it will continue into next year. It will be as long as the voluntary call for conservation is in existence from Valley Water or water wholesaler. And as Eric highlighted in his comments, they've got specific areas that they're trying to guard against, which is higher usage when they have lower storage. So with that in mind, I think the view will be that they will be in a more of a conservation mode for some time to come.

Agnieszka Anna Storozynski

And then again, on the same topic. So some of the strengths in third quarter results had to do with recovering usage probably mostly in Texas, but also in California. And so I'm just wondering if some of this benefit will be offset or absorbed by the fourth quarter booking of the WCEMA.

Andrew F. Walters

So it's definitely in the number that is already provided for what we would have booked reflects the current usage. So what that tells you is we're still at least for the period of time ending in the third quarter, there was greater underutilization by customers up through the second quarter. But in the third quarter, we saw relatively less usage compared to those prior quarters, but it still is a benefit for us. And so that's going to be something that will continue for a period of time. There will likely be a benefit that will continue into the fourth quarter. We have not recovered to authorized revenue, just to be clear.

Agnieszka Anna Storozynski

Okay. And then lastly, you mentioned the $0.04 to $0.06 of costs in '24 associated with the growth of the business. But I'm just wondering if there is any catch-up on the cost side from 2023? I mean, you clearly didn't know if the WCMA is going to be reinstated. So I'm sure that you are managing your O&M expenses around the guidance. So again, is there any level of cost that is basically delayed?

Andrew F. Walters

No, as I said, excellent question. And I think that's something that people will look at different ways that they can manage. We try to focus on not impacting our operations, particularly in the maintenance of our business. We look for other ways that we can save, and particularly, we focus on our methods, which we were very successful at doing. We looked at the way that we're operating the business. And it just took time for that to catch up with us and has produced the results. That process that the team has been working on is years in the making, and we're finally seeing the results with that, continue to focus on how they impact our maintenance and operations. That is something that will continue into next year. So I don't expect…

(technical difficulty)

Operator

Please standby for the next question. The next question comes from Richard Sunderland with JPMorgan.

Richard Wallace Sunderland

Hi, good morning. Can you hear me?

Andrew F. Walters

We can. Thank you.

Richard Wallace Sunderland

Great. Thanks for the time today. Picking up on the last question and maybe I missed it with the echo there. So apologies for treated ground. But the $0.08 and the $0.04 to $0.06 identified in the script, is that drawing a line to those items versus the $0.20 to $0.25 guidance increase? The delta is recurring in 2024 putting aside the question of usage, which I recognize complicates things? Or is that overly simplistic in terms of what you have that's structural and recurring into next year?

Andrew F. Walters

Right. That's an excellent question, and that's what it's meant to do is to try to give a little bit of guide rails as people think about it. We're not through our budgeting process. But we know that there are some things that we want to do that is not like maintenance related but are things that we can invest in our business to make it stronger in the future. So there is going to be a little bit of that investment that we will take this opportunity in 2024 to execute on some of those items. Now if you think, though, about it, the $0.08, if you just go from a high point to high point of $250 to $270, that $0.08 comes off for next year because it is definitely not a recurring item. That was something that was due to the IRS regulation change and allowed us to take that benefit into this year.

Richard Wallace Sunderland

Understood. I guess changing topics to Texas, the drought conditions, sound like real local challenges. Can you speak to, I guess, a little bit of the push and pull here between the strong growth in the state relative to the drought and usage impacts and how to think about overall risk or opportunity here into '24, you should, I guess, A, the conditions stay as is or B, there's an improvement in the drought?

Andrew F. Walters

It's a great question. Look, I think the good news is that this is definitely a weather-driven aspect. And what we are seen as we have seen some early rains impact the area, not the kind of range that will change our water supply, but this is a little bit on the earlier side to see some of those reins and could be a view towards where the El Nino will drive a higher usage our precipitation in Texas and that old belts that has been quite impacted by the drought. So I think that those are the possibilities. Now I'm not going to talk about 2024 per se, but I will talk about the future. So that addition of KT Water and the 40% increase in the water supply that brings to the system, that is something that the team is working very hard to get implemented. And as we get that implemented into our system, that will further diversify the water sources that we have able to support not only the growth but also times of drought. And so it's a very significant addition that will have a meaningful impact on our resiliency into the future.

Richard Wallace Sunderland

Got it. Very helpful. You got to where my follow-up was going to be. So maybe I'll just ask one other question on the Connecticut side. I think in terms of the filing, you framed it as 2/3 related to capital. Just thinking about that overall, is that inclusive of WICA roll-ins in terms of the 2/3 and the overall increase? And how does that look excluding the WICA side, just in terms of a new ask on ratepayers here?

Andrew F. Walters

Yes. So it's a good question. I'm going to follow up with you on the specific that comes off of the WICA. If you think about the WICA just off the top of my head, there's a 7% that's filed in place of revenue of the 10% revenue. So there is definitely a portion that those will get rolled in. But as we looked at our overall numbers for Connecticut, the amount of investment has driven the rate increase. And that's really what the story is, is that as opposed to having an expense increase driven, this is about capital investment, which is the most sustainable approach towards rate increases for our customers.

Eric W. Thornburg

Yes. Just what I would add, Richard, is that none of the amounts filed includes any WICA because that's a separate proceeding, and it will get rolled in, but it doesn't reduce the amount requested. And I would just further comment that we're actually optimistic regarding this filing in Connecticut. We've carefully reviewed the Aquarion and Avangrid decisions. And I think we've very effectively applied the lessons learned in some of the new expectations that PURA articulated in those final orders. So our delay in our case filing was effective, I believe, in addressing those concerns and we expect to be treated fairly in this process, and we'll keep investors posted as we proceed throughout the year.

Operator

Please standby for the next question. The next question comes from Jonathan Reeder with Wells Fargo Securities. Your line is open.

Jonathan Garrett Reeder

So a lot of my questions have been asked. But Andrew, I do want to give just a little clarity. When you were talking about the revised '23 guidance, what was the $0.04 to $0.06 dilutive impact related to?

Andrew F. Walters

So the $0.04 to $0.06 is for 2024. So do not think about that as a this-year item. But as we look at our business and the opportunity that we can use to invest in it and create future growth well into the future. We're going to take some of that opportunity in 2024. So that's what it is. It's really massive kind of keep people in mind that there is -- it's not just like you start adding the numbers on, you need to account for the fact that we do have some plans as a management team to continue to make that growth be sustainable well into the future. The $0.08 that you do need to account for this year is just really the nonrepeating item related to the tax change. And so that, again, those were all met for people as they think about 2024 and beyond. It was not to do with this year.

Jonathan Garrett Reeder

Okay. That makes sense. Great. And then what was the benefit from the year-end repair tax study? Is that something that carries forward?

Andrew F. Walters

That's something that will come in. It's something we actually, when we're giving you the guidance, we don't have the answer to that as we're giving guidance. So that's hence the range. And why we're highlighting that is one of the items that we have to pay attention to for the outcome of which could drive results higher or lower than what we're projecting.

Jonathan Garrett Reeder

Okay. But that's something that, based on that study that will continue in the future.

Andrew F. Walters

Right. Typically, when you do those studies, you have a onetime catch-up for stuff that's been in the system, but it will continue to have an impact on those new additions that qualify under that study. We'll definitely talk about that in the fourth quarter, obviously.

Jonathan Garrett Reeder

Okay. Right, it's tough at this point to say, I guess, what we should be looking at is like normalized 2023 EPS power, it sounds like it's above the $2.40 to $2.50 to some degree.

Andrew F. Walters

That's correct. It's definitely an expansion of where we are today from our previous forecast into 2024…

Jonathan Garrett Reeder

Yes. I mean I guess when you're going into the year, the 2 things that maybe you're really unsure. I think, well, you weren't expecting the WCMA, I don't think to get extended. I mean that wasn't in the base forecast. And then I think the outcome and the cost of capital ends up being a little better than initially expected. Are those 2 things fair?

Andrew F. Walters

Those are fair along with the other things that I went through, the usage recovery and to some extent. And then obviously, the performance of our team, they did a really good job of where we expected this to be a more challenging year than what has come before us. The team really did a good job, and there's a lot of stuff that's below the radar that we wouldn't talk about because it's lower materiality. So it's a lot of singles and doubles that added up to a good outcome.

Jonathan Garrett Reeder

Okay. Good. Now congrats on a good quarter and thank you for taking my questions.

Operator

Please stand by for the next question. The next question comes from Gregg Orrill with UBS.

Gregg Gillander Orrill

Maybe an obvious clarification, but the $2.7 million after-tax remaining for the WCMA, WCEMA. That comes in, in the fourth quarter?

Andrew F. Walters

That will come in the fourth quarter. It's not reflected in the third quarter earnings because the approval did not come in until after that time frame. But that's reflected, obviously, in that guidance that we've provided.

Operator

(Operator Instructions) Please standby for the next question. The next question comes from Angie Storozynski with Seaport Research Partners.

Agnieszka Anna Storozynski

Thank you. Just a couple of things. So I know you're not providing our 24% guidance but [I will still ask]. So here's my question. So on the one hand, you have the support from the high ROE in California that there's some effective tax rate changes, cost changes, et cetera. But also you've delayed the Connecticut rate case, right? So I know that that's probably a very small earnings driver, but I'm clearly sufficient for like a directional guidance on '24. Are we basically staying largely flat? Hence, you emphasize a nonlinear nature of your growth rate and especially with those benefits that we discussed to '23 that makes -- basically it's very hard to actually solve for growth in earnings year-over-year between '23 and '24, at least that would be my take as of now?

Andrew F. Walters

Yes. Look, Angie, I definitely think that there should be some factors that increase our 2024 based off of our performance and where we expect things to go. What I do want to caution against is getting too aggressive with those increases, I don't want to disappoint folks once we get done with our budgeting process. So I'm trying to be as transparent as possible about the things that we see today that we will do some additional investment and there's some onetime items that you have to take back out in order to get there. But even once you do that, there should be some upside versus where most of us were looking at or 2024.

Agnieszka Anna Storozynski

Okay. And then change in CapEx. So you mentioned PFAS CapEx. So can you give us a sense of the recovery? You mentioned the potential settlement with polluters. I'm just trying to understand how this spending flows through your rate base and what's the recovery mechanism?

Andrew F. Walters

So for us, I think the key is we don't anticipate a significant cost offset due to the settlement. There will be some. But that is to be determined. There's a lot of people that are participating you've got to fit the claims in, in that place. That process is going to take a significant period of time, which we don't have time for. Whenever there is something like this for us to address on behalf of our customers, we're going to be very aggressive at working towards addressing the issues. And so given that, we will use a focus on the traditional recovery mechanisms that are at our disposal, which are various regulatory agencies have been very supportive of trying to take care of the health and safety of our customers.

Operator

Please stand by for our next question. The next question comes from Jonathan Reeder with Wells Fargo Securities.

Jonathan Garrett Reeder

Sorry, I just thought one follow-up, if you don't mind. So I know previously you said you weren't optimistic that the CPUC or at least the staff would be supportive of bringing back decoupling in California. Does the approval of like the WCMA? Does that change that perspective at all that they are taking bigger picture, longer-term conservation effort and putting those kind of tools in place, including potentially decoupling would be beneficial?

Andrew F. Walters

No. I think what they're highlighting is they're focused on the specific issues that we're dealing with in our service area of having the voluntary drought declaration, and they recognize that it sends mixed messages to your customers and that it creates undue stress on a company like us to try to recover when you've got the major wholesaler promoting conservation and trying to get people to use less water. So given that, I think they've highlighted the need to make sure that everybody is driven towards the same results, and that would be my view. And I do know...

Eric W. Thornburg

Yes, I'd just add, Jonathan, Valley Water has Anderson Reservoir undergoing a seismic refit. And because of the lower pool, it has to be maintained during that construction period. It's a bit of a unique circumstance, but it's expected to be out of service or reduce service for nearly a decade, while that work under is undergone. So I think for the foreseeable future, SJWC will benefit from this based upon those circumstances.

Jonathan Garrett Reeder

Okay. And you said that's supposed to that project is like a 10-year project.

Eric W. Thornburg

That's correct. Yes. Anderson Reservoir.

Operator

I show no further questions at this time. I would now like to turn the call back to Eric Thornburg for closing remarks.

Eric W. Thornburg

Thank you, operator. On behalf of all my colleagues and the Board, we thank investors for their continuing support of and interest in SJW Group, an organization with over a century and a half of service to communities across the U.S., and we're just getting started. Thank you very much.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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