Q1 2024 California Water Service Group Earnings Call

Participants

James Lynch; Chief Financial Officer, Senior Vice President, Treasurer; California Water Service Group

Martin Kropelnicki; Chairman of the Board, President, Chief Executive Officer; California Water Service Group

Greg Milleman; Vice President - Rates and Regulatory Affairs; California Water Service Group

Michael Gaugler; Analyst; Janney Montgomery Scott

Jonathan Reeder; Analyst; Wells Fargo

Angie Storozynski; Analyst; Seaport Research Partners

David Sandelman; Analyst; Baird

Presentation

Operator

Good day, ladies and gentlemen, thank you for standing by, and welcome to the California Water Service Group First Quarter 2024 earnings call. During today's presentation, all parties will be in a listen mode only Following the presentation, the conference will be open for question and answer this call is being recorded. I'd like to turn the call over to Jim Lynch, Senior Vice President, CFO and Treasurer. Please go ahead.

James Lynch

Thank you, Allie, and welcome, everyone, to our first quarter 2024 results call for California Water Service Group. With me today is Marty Kropelnicki, our Chairman and CEO, and Greg Millman, Vice President of Rates and Regulatory Affairs replay. Dial-in information for this call can be found in our quarterly results release, which was issued earlier today. A replay of the call will be available until Monday, June 24, 2024.
As a reminder, before we begin, the company has a slide deck to accompany the earnings call today. The slide deck was furnished with an 8-K and is also available at the Company's website at w. w. w. U. Cal Water Group.com.
Before looking at the first quarter 2024 results, I'd like to take a few moments to cover forward-looking statements. During the course of the call, the Company may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties, and actual results could differ materially from the Company's current expectations. Because of this company strongly advises all current shareholders as well as interested parties to carefully read and understand the company's disclosures on risks and uncertainties found in our Forms 10 K, 10 Q press releases and other reports filed from time to time with the Securities and Exchange Commission.
And now I will turn the call over to Marty.

Martin Kropelnicki

Thank you, Jim. Good morning, everyone. Thanks for joining us today to talk about our Q. one and 2024 results. We have a number of topics to cover today, starting with our strong operational performance, which is really highlighted by the final resolution of the 2021 General Rate Case. And I will say it's after going through the delays which stretched out over 2023. It's nice to see the arrows all going in the right direction and big kudos to Jim and
And Jim and the team for booking everything and getting it all set up here as we wrap up Q1, in addition will want to talk about the implementations, the water cost of capital adjustment mechanism, which sets our return on equity for 24 2024 at 10.27%. We were able to secure an additional $83 million of COVID funds from the State of California to help our customers with past due balances that linger from our COVID times and then talk about our where we are with P. phos in the EPA's new regulation and our plans in compliance with that and then finally, wrap up talking about the commitment we made recently to reduce our Scope one and Scope two emissions.
But prior to going into some of these more operational things, I'm going to turn it back over to Jim to briefly review the financial results for the first quarter of 2020 for Jim.

James Lynch

Thank you, Marty. Already mentioned our first quarter results benefited from the conclusion of our 2021 General Rate Case.
Operating revenue for the quarter increased 106.5% to $270.7 million compared to the prior year first quarter revenue of $131.1 million, implementation of two regulatory mechanisms authorized by the 2021 GRC decision had a significant impact on revenues with the interim rate memorandum account or Irma, adding $80.7 million and the Monterey style water revenue mechanism or RAM, adding $31.7 million recorded Irma and MRAM. revenue included $70.2 million and $17.6 million, respectively, related to fiscal year 2023. Greg will walk us through the 2021 GRC decision later in the presentation.
The revenue increase also included $13.9 million related to the recognition of water revenue adjustment mechanism or RAM revenue that was deferred in previous reporting periods. First Quarter 2020 for operating expenses increased to $192.9 million compared to the first quarter total operating expenses of $148.6 million or $44.3 million of increase was primarily driven by $9.2 million in higher water production costs associated with the Company's new incremental cost balancing account or ICBA higher other operations expenses, primarily due to $11.4 million in deferred costs associated with the recognized deferred RAM revenue and a 21.2 million increase in income taxes related to higher pretax earnings.
Net interest expense increased 25.5% to 15 million during the first quarter as compared to 12 million for the first quarter of 2023. The increase was primarily due to higher short-term borrowing rates and higher balances on our outstanding lines of credit. Reported net income for the first quarter was $69.9 million, up nearly 415% compared to a loss of $22.2 million in the first quarter of 2023.
Turning to the earnings per share, first quarter 2024 earnings diluted earnings per share was $1.21 compared to first quarter 2023 loss of $0.4 per share. A significant increase in EPS was driven by resolution of our 2021 General Rate Case, coupled with rate increases and the reversal of previously deferred RAM revenue. These increases were partially offset by increased expenses, including higher water production expenses related to the new ICBA. regulatory mechanism higher production expenses due to the reversal of RAM related deferred production costs and interest expense.
Turning to capital, we continue to make significant investments in our water utilities to help ensure the delivery of safe and reliable water service. We invested just under $110 million in capital improvements during the first quarter of 2024. This was an increase of approximately 34% over the first quarter of 2023. For the year, we anticipate making approximately $380 million in capital investments, which includes an estimated $20 million in developer funded projects.
Depreciation for the first quarter of 2024 was $32.8 million or approximately 30% of first quarter capital investment expenditures. The success of our capital investment strategy is reflected in our rate base growth. Our overall rate base grew to an estimated $2.2 billion by the end of 2023, which was an increase of 15.4% over 2022. Further, based on our current planned capital expenditures and subject to regulatory approval, we estimate that rate base will grow to $2.36 billion by the end of 2024 and $2.47 billion by the end of 2025.
Turning to dividends. At the beginning of the year, we increased the annual dividend 7.7% from $1.4 to $1.12 per share, which marked our 57th consecutive annual dividend increase. And yesterday, we declared a quarterly dividend of $0.28 per share for shareholders on record as of May sixth, 2024. This was our 317th consecutive total quarterly dividend. We continue to maintain a strong liquidity position as of March 31st, 2020 for the Company maintain cash and cash equivalents of $88.3 million, of which $45.4 million was classified as restricted. Further, we had additional short-term borrowing capacity on our lines of credit of $320 million.
Lastly, we're pleased to report that subsequent to the end of the quarter, we received approximately $83 million under the State of California extended arrearage program. The program is designed to provide financial assistance to customers with past due balances that accrued during the COVID-19 pandemic. Marty will provide additional color on the program in a few minutes.
With that, I'll turn the call over to Greg to give an update on our 2021 General Rate Case decision.

Greg Milleman

Right, sir. Thanks, Jim. To walk through some of the highlights of the decision. We for our 2021 GRC decision that we received March seventh, 2020 for overall, the decision was a financially very positive for the Company. As Jim indicated that decision increases adopted revenues after corrections for 2023 by approximately $41.5 million retroactive back to January first, 2023.
The decision also adopted 95% of the requested operating expenses. It adopted a very favorable water mix for above ground water purchase water that provides the Company financial for protection. It authorizes kilowatt or to invest $1.2 billion, which is 86, 86% of our request, probably from 2021 through 2024.
And our water system infrastructure projects including approximately $160 million of infrastructure projects that may be submitted for recovery via the TEC.'s advice at a profit. In fact, we've already filed an advice letter for 145 projects, capitalize that $39 million for a $5.8 million increase in annual revenues. This decision provides a very progressive rate design that provides financial stability while benefiting low income, low water using customers.
And finally, and most importantly, when voting of the decision on March seventh, the Commission, the commissioners all agree that the process took too long. And so I'm hopeful that the decision on our 24 case will come out more time with that team are great things.
Great. Just echo what you said when we were in the hearing room with commissioners, every Commissioner did comment on that and we think that's a good sign that they recognize the problems. This was causing not only for us, but also for our customers. And that's going to have a pancake in effect on the rate.
I'm going to be on Slide 10. I want to come back to the extended arrearage management program for the State of California. I think as many of you know, we have been extremely proactive, our government affairs team in Sacramento and looking for ways to help our customers who are still suffering kind of the hangover of the pandemic.
If you recall, the state of California had an original arrearage management programs that kind of cover half of the COVID time and then in China and for that first part, the company was able to secure a little over $20 million that was applied to our customer balances during the COVID time, we were able to work with the state to take some of the unspent federal dollars that were allocated to the states and come up with their arrearage management program kind of number two.
So we work with state to appropriate on approximately $300 million to $400 million of unspent federal dollars and reopen up that window to allow utilities and water companies to apply for further funds to offset past due balances from June 16th, 2021, through December 31, 2022. I'm very happy to report that our application was accepted and we received the entirety of our request, which is a $3 million that Jim mentioned. That money has been received and during the second quarter, we'll be allocating those dollars to those past due balances, again from between June 16th, 2021 through December 31, 2022. These funds benefit both current and past customers because all customers eventually bear the costs of uncollectible accounts.
And moving on to slide 11, I want to take a moment to update everyone on where we are with the P phos regulations that have come out also nice forever chemical chemicals. We believe we continue to be well positioned to meet the EPA's new guidelines across our portfolio. We have a rigorous and coordinated water quality assurance program with protocols in place to test and monitor the water we deliver to our customers. I think it is any of you know that debt invest in investor-owned water utilities.
We take public health as one of the most important things we do as a company, we've had a fair amount of experience with P4 and P5 in California and Washington, our utilities have been compliant with the previously issued POS. guidelines issued by the state regulators on April 18, the California Public Utilities Commission dismissed our application requesting authorization to modify a previously approved P Boss expense, balancing account to include capital investments related to keep us compliant.
Cpuc indicated that we would need to file for recovery of the capital components of Peabody's treatment later in the process. What that really means is, first of all, I was disappointed. They they denied it. They dismissed without prejudice, but it allows us to file a separate out. The claim application are included in the 2024 general rate case. And I believe, Greg, our plans are to file it as a separate application.
That is great.
Outside the rate case, despite the commission shortsighted in this recognizing the urgency that you need to get this PayPass treatment in the ground. The Company put a press release out reaffirming our commitment to our customers that we'll be investing the $215 million expeditiously to put people on treatment in place for approximately 100 wells in all the states that we operate in.
Overall, it is a group meeting at the parent company project. So we have a project director who is managing the implementation in all of our states in that group, our that project director reports in the management committee on a normal basis. And we are we have hit the ground running, which we plan to spend probably between 12 and $20 million this year on Oxy phos treatment. And that will ramp up as we go out into the implementation period over the next couple of years.
Larry, before you move on, you mentioned teapot balancing account and believe we're trying to narrow the gap narrow thing here as it has a memo account.
So it's outside the rate case. We're incurring the cost. It goes to the P&L, but where a lot of track those costs than perhaps the Commission to allow us to modify that memo account to pick up the capital components, which was denied. Our capital projects in the rate-making world do accruing AFUDC allowance for funds used during construction, and that will accrue alpha throughout the process until we put that plant in service.
Moving on to slide 12, where we talk about greenhouse gas and Scope one and Scope two reduction targets as we worked on our decarbonization strategy and our ESG strategy. Overall, the last five years, we recently made our commitment to reduce absolute Scope one and Scope two greenhouse gases by 63% by 2023 from our baseline 2021 year.
Our Tiger targets are science aligned, which about the team's done a very good job working with a third party advisor to pull that data together, we expect to achieve these reductions through a multi-prong approach consisting of the electrification of the fleet water conservation, installing on-site solar, where it makes sense and looking at renewable electricity, electricity procurement, in other words, making sure we're tapping into the green side of the grid for the power that we use as many of you may recall, water production and distribution uses a lot of energy. \
So the more green energy we can use the more it helps us drive towards that target as well as the other components here and the multi-prong strategy. It just doesn't ask why group may evolve its decarbonization strategy if warranted due to changes in industry working with our regulator business and other operating things that may happen, including SEC rules, et cetera. But overall, we're very committed to delivering value to our customers and stockholders while pursuing these reduction targets and believe it's the right long-term approach as we deal with change.
Going on to slide 13. So just to kind of recap, I'm very pleased with the start of 2024 and getting into 2021 rate case behind us. Nice to have that done. The numbers will be a little confusing. Obviously, when we publish the 10-Q here later on this week, there will be more information so you can you can strip out what was the retroactive piece and what was the actual piece for the quarter itself?
We're going to now turn our focus on implementing our infrastructure improvement plans. As Craig mentioned, we have a lot of capital to get into the ground in addition to the P. five. So the guidance that Jim gave everyone earlier, does not include the $215 million commitment for POSR. for for the Forever chemical treatments that we have made to our customers. So that will be incremental.
And one other thing to put on everyone's calendar, we have our state supreme court date on on May May eighth, and that's our oral arguments on the RAM decision from the Commission. So we'll look forward to, hopefully having and some type of decision by the State Supreme Court probably pretty much after the oral argument or so. So we're looking forward to having that going forward because we believe decoupling is absolutely essential to the state of California as work on climate change, resiliency and sustainability.
Tom, so with that, I want to thank everyone for bearing with us through the delays in the 2021 General Rate Case. I want to thank the rates and accounting team for their hard work on. Not only do we have to close out the year, but right after we got the decision, we had to book everything. So the team did a fantastic job getting that bad stuff, all both from the general ledger. And now we'll move forward on to our 2024 plans.
Investing in infrastructure going after Pete Boss and the boss treatment in and getting our rate case filed for the State of California on July around on or around July first.
So Ali, with that, let's open it up four questions please.

Question and Answer Session

Operator

(Operator Instructions)
Michael Gaugler, Janney Montgomery Scott.

Michael Gaugler

Morning, everyone. Sorry, Michael and Michael, but I was just wondering if you could update us on water supply and water production costs and others they were rather high in the quarter and there Jim touched on a little bit and maybe how we should think about that for the remainder of the year?

Martin Kropelnicki

Sure, Jim.

James Lynch

Yes, hello. From a water supply perspective, Michael, that the state of California is doing very well. I believe our snowpack count for the second consecutive year was higher than our 20-year average. And I think it's the first time in an awful long time that we've had two consecutive years where we would beat the average. So I think we're looking good. There's been good opportunity also for replenishment of some of our underground aquifers throughout the state and California. I think our other states are also similarly well positioned in terms of actual water supply. We do have some operations in Texas.
Most of our utilities down there are wastewater utilities. And I think that term that we've not seen the current water situation in Texas put any stress on those operations as it relates to expenses and water expenses we do have in California with the new rate case, the new ICBA, which provides us some protection in terms of cost increases in our water production from. And and so we will lean on that new mechanism and focus on that to as Asim as the familiarity with the new mechanism becomes greater.
And then I'd also like to point out that we did have an increase in other production expenses. I mentioned it on my in my comments, and those were primarily related to the recognition of the deferred RAM revenue. So I would I would view those more as something that will continue to reduce as we go as we kind of unwind those deferral deferred revenue costs.
Yes, one thing I would add is just Jim said, the snowpack was very, very good on water supply and within the state of California, I think is doing great, but California is still in a stage to drought if you remember, we're racing towards Stage three Brown in the governor's walk that back, and we're still in a stage to drought, which I kind of expect the governor to stay in stage two or maybe drop it down to stage one, given the longer-term issues of sustainability with the state Climate Change the variations we get in the weather. But overall for 2024. We think we're in good shape in all of our districts.

Michael Gaugler

All right. Thank you, gentlemen. Most helpful.

Martin Kropelnicki

Thanks, Michael.

James Lynch

Thanks, Michael.

Operator

Jonathan Reeder, Wells Fargo.

Jonathan Reeder

Hey, good morning, team. I've got a couple of questions here, if you don't mind. First would be how should we think about the timing of the cash recovery of the retroactive 2023 GRC revenues.

Greg Milleman

And Jonathan, this is Greg mill, and we will be up because of the timing of the 21 decision in our upcoming filing on July first of our 24 rate case, we have been focused on implementing the new rate. You get those into effect, first calculate what the lost revenue or the Irma out and the RAM amount will be so that we could book that we will be filing in the third quarter for recovery of those back monies.
We need to go through May 31 when we're planning to have the new rates fully in effect and close out the year in that account. But then we need some time to put together that filing and start requesting. And so we'll start requesting it in on in the third quarter is based on a on a per CCF surcharge. So I would imagine in the summer it will be a little bit higher. And then obviously in the winter months lower, it goes some place from 12 to the format.

Jonathan Reeder

Okay. So it sounds like I mean, those revenues aren't going to really come in in 2024 or probably more 25 and 26. The revenues were booked in the first quarter and it ties into your question was related to cash, know exactly our yet the cash flows won't come in until 25 and 26 ad budgets.

Greg Milleman

Yes. The one thing I would point out, though, is the timing of when the new rates will go into effect, we will at least experience the positive cash uptick related to those new rates as we go into our more traditionally busy season. So we were pleased to be able to to get the rates effective as of one.

Jonathan Reeder

Got you. And then how should we think I guess about the $83 million arrearage payment program, cash recovery on potentially like offsetting 2020 for external equity needs?

James Lynch

Yes. So if you remember, during COVID, we were decoupled. So the revenues all accounted for through the decoupling mechanisms from the State of California. So that this piece really becomes cash flow. And so essentially customers that have balances that are still past-due from the period that I defined as of June 16th, 2021 through the end of 2022.
Our balances those dollars will be applied to their balances and then we'll also be applying some of those balances to the RAM balances that existed for those customers as well. So that will all work its way into cash flow, but it won't really have a revenue effect and will have an effect on the aged receivables that are still outstanding during COVID and you'll see a pickup in cash flow. So certainly that that helps the company from going to the market and needing to issue equity right away. Obviously, water utility stocks over 2023 on everyone was down 20 plus percent.
So we're not raising the market anytime soon to go sell stock and Jim's not running a piece of paper at me for saying that, but I can't but the reality is with this rate case. And with the step-up in the rate design, the movement from fixed from variable to more being more recovered and fixed, that's all going to help us throughout this year. But if you think about our capital needs, we're still investing at three times our depreciation rate.
And on, as Greg mentioned, we got 86% of our assets, a $1.2 billion capital program. So we do have adequate lines, et cetera. But Jim and I will be evaluating that as we go throughout the year to define what those needs are obviously with interest carrying costs being higher on the stock being down and we still got to get our job done. There's a fine line that we'll be looking at our cap structure and trying to optimize that on behalf of our stockholders, but also our customers as well because it helps play into affordability.

Jonathan Reeder

Okay. So in terms of like absolute size of annual equity needs, that's still to be determined at this point?

James Lynch

Yes, I think I think so. You know, John, the real good news is that from the recognition of the 2023, our ability to recognize the 2023 impact of the 2021 decision, as Tom brought us back to where we had hoped we would be at this point in time relative to our cap structure, which is very close to our authorized cap structure.
So there's not a need right now in terms of forcing us I wouldn't say forcing us, but directing us into which particular capital we would pursue in the event that we needed to pursue capital. And so I think right now we've got a lot of availability on our line of credit. We understand that the interest rates are still inverted, so we'll be taking a look at it short term versus long term debt amongst other things as we move forward.
But it's only with the booking of the Currenta, our rate case results for 2021 rate case results that were in the position now to kind of forecast out what we think we might need from a capital perspective for the remaining of the year.
And we're also benefiting from the higher ROE that went into effect on January first, the 10.27 ROVs. That's also helping us with our cash flows.

Jonathan Reeder

Yes, sure. And what have you brought up?

Martin Kropelnicki

You are we can weave into the next question, please.

Jonathan Reeder

And I guess just given the GRC final outcome and the recovery of some of the CapEx through the advice letter recovery process, where do you expect your earned ROEs in 24 and 25 to come in relative to the allowed levels.

James Lynch

So that's a that's a very good question. On 25, certainly a little harder to talk about, but from a budgeting perspective and how we manage the company, frankly, trying to drive towards hitting that ROE., obviously, when you have a delayed rate case, it throws everything kind of off balance significantly off balance. So I think for 2024, we should be at or maybe slightly above that ROE for 2025. You start to get the period of regulatory lag. It starts to see been and obviously inflation is a big deal.
On getting back to Michael diverse questions about about production costs. You know and Northern California, Idaho for time of use rates for electricity, it's now $42.5 a kilowatt hour, highest cost in the US. So that's stuff that affects the operating side that will also lag and hopefully somebody will get picked up in the rate case. But as inflation stays high, a lot of it gets pushed out into the next rate filing. So certainly for 2024, I think we're in excellent shape for 2025.
We're going to budget to hit our ROE, and that's kind of our job and I think as Jim talked about, you know, time is there an opportunity with inverted interest rates short term versus long term on how we finance things where we're going to take a look at all that because our job is to operate as efficiently as possible for earning ROEs for our stockholders and keeping rates affordable for our customers. So 25 hard to comment on 24. We're going to drive hard at the ROA.

Jonathan Reeder

Okay. And then lastly, I know you said you filed for $39 million of the advice letter recovery projects already. How much do you expect to file in total in 2024? And then what about in 2025?

James Lynch

It has to be determined, Jonathan, if anyone listened into the rate proceeding, I thought it was kind of fascinating because the commission was really kind of focused on Phase 335 projects. That company didn't get done or they only got done five of these 335 projects. And but as you know, numbers are relevant, right? And so during this three-year period, we probably had 5,000 to 6,000 total projects that we completed. Those are talked about. They were just focused on these 335 projects that didn't get done there's two failures that I see in the rate-making process in the state of California.
One is the failure to recognize that projects now go through one or two and even three rate case cycles. So you want to put a well in Southern California, you know, by the time you procure the land designed the well could sign up on the treatment build a treatment go through testing, put it and put it in service, it's longer than three years. And so the rate making process to California fails to recognize these projects now are multi-cycle projects.
Second thing that the commission fails to recognize the right make making process is as these projects big projects get more complicated and go farther in time, the level of contingency needed for those projects goes up. And if you listen to the hearing, the commission tossed out a lot of the contingencies associated with these projects.
So those are the two things that Greg has to work on in the 2024 rate case. And obviously, they're kind of in bread into the process in the rate-making process within the state of California. But those are the two of the things we're going to be focusing on in 2024 because both those things help lead to regulatory lag and beyond the reality is if you followed us for a long time, we're very good about hitting our capital commitment numbers and getting that capital in the ground, right?
It's really about on the backside the rate-making process and the efficiency of the rate-making process. So we'll have to see what happens next. But I think we'll keep doing what we're doing and we're going to keep investing at three times the depreciation rate, which I think benefits our stockholders while focusing on affordability.

Jonathan Reeder

Okay. But out of those $160 million projects, do you expect to like complete them all over the course of 2024 and 2025? Or might some of those fall into the next rate case cycle still?

James Lynch

Yes. We're we have a concerted effort going on right now to reevaluate those projects from two perspectives, one to confirm that they are still needed and to make sure with regards to that first point to make sure they weren't just projects that we've subsequently found other alternatives for and to to to really identify what time period we are going to complete the projects and put them in service for those for those that remain out of the $160 million.
So at this point, I think that process is still underway and we'll have a better sense for the timing of that here in the next couple of weeks.

Jonathan Reeder

Okay. Thanks.

James Lynch

I appreciate you taking my questions.

Greg Milleman

Thanks, Charles, and take care.

Operator

Angie Storozynski, Seaport Research Partners.

Angie Storozynski

Thank you. So first, maybe you alluded to the 10 Q, which will have more information about the other retroactive impacts on the first quarter earnings. But can you just give us a sense like roughly what what it is from an EPS perspective versus that?

James Lynch

So a 21 that you reported Well, we haven't broken it down from an earnings per share perspective, but relatively speaking, there was approximately $90 million of earnings of revenue that was included in the 2024 first quarter that related to the ATM, the decision. And in addition to that, there was a an incremental about $8.5 million of expenses that related to the decision.

Angie Storozynski

Okay. I mean, it's that you don't have guidance. So that's actually pretty important for us to have a bit of a basis to extrapolate from right. So again, we will probably appreciate it going forward? And secondly, on the PFS spending, so So will you be booking AFUDC earnings associated with this CapEx? So will it flow through via the income statement?

Martin Kropelnicki

Well, as you know, AFUDC is we are eligible to use the FDC. mechanism as we move forward with those expenditures. So I think that the way you're asking the question, we will be able to reduce our interest expense for the AFUDC to the extent that we are making expenditures related to those projects.

Angie Storozynski

Okay. And then on the interest in general and PFS. So we're starting to see some that of losses against investor-owned utilities related to PFS. You know the fact that and in our view, or in general utilities, we're not attempting to remove the the four of our chemicals from wild from distributed water in the past. And I'm just wondering how you can protect yourself. Is there anything in California that would allow you to limit the litigation risk, but more importantly, limit any earnings impact?

Greg Milleman

Yes. I think from a liability standpoint, in California, we have we have a well, which basically says Hartwell decision, which basically says if we operate in accordance with the rules set forth by our regulator that we have protection. So I don't I'm not too worried about California compared to some of the stuff that we're seeing on the East Coast in terms of product liability associated with water, et cetera.
From an earnings perspective, as Jim said, it will accrue AFUDC on those capital projects. Most of the treatment is capital on and it's 100 wells out of 1,170 wells total that we have within the group and so we'll accumulate AFUDC on that. And then those other capital costs get picked up in any of the operating costs. Once we put those vessels into production, we'll track the incremental cost through the through the memo account and seek recovery of that at a later date.
So I think we got kind of all the pieces in place that we have. I wish I was disappointed in the Commission's decision not to recognize the capital now because the EPS, but that new standard out there, they did extend the implementation time line and deployments over five years now versus over three. But you got many customers don't want to hear. We're going to implement PFAS treatment 4.5 years from now, if Jim's drinking water SP. Boston, and he wants to know where treatment right away.
And so that's why when we put our press release out, we pointed out, we were disappointed in the Commission's decision. And despite that, we reaffirmed our commitment getting that capital on the ground as quickly as possible. And so from an operating cost perspective on, I'm not too worried about it to me, it's about making sure the water safe for customers and implementing that capital as quickly as possible.

Angie Storozynski

And then just one other point on that, Angie, we are pursuing any available gram data that may be out there to assist with that with the full PFIC issue as well as potential third party liability?

Martin Kropelnicki

Yes, there's a lot of litigation around P phos to the actually to the polluters. And there's been a ton of press on that. I don't want to get into particulars of the case because we're a member of the action against the polluters, but we believe we'll get some some dollars back from the polluters offset the implementation costs and the capital cost of putting keep us treatment in place.
Okay. And then lastly, Tom, you mentioned they have weak performance of water utility stocks and on the timing of your future equity needs. I'm just wondering if you raised your dividend by and getting 7% something. So is this do you think that, you know, going forward depending on the stock performance, the growth in dividends is a lever for you too essentially used to adjust downwards faster and you know, if you have higher equity needs or is this a lever in this high interest rate environment as well? And again, what does this 7% plus linked to certainly in the Domecq project?

Yes. If you look at our dividend increases over the last five years that they've been above inflation that we have a payout ratio target between 55% and 65%. We're trying to manage within that range on. I personally believe that a compound annual growth rate of dividends is one of the key drivers to equity valuation in the marketplace. And so looking at that Tiger number, as Jim mentioned, we've grown the dividend every year for the last 57 years.
So I have no reason to believe we won't continue down that path. Obviously, when the Board looks at that we look at what's the general market conditions, what was the dividend growth rate of other other utilities, what our capital needs, and we tried to keep that all in balance. But obviously from for me personally, I think dividend growth is a key thing that our investors expect and they like to see and they like the stability of a water company. So to me, yes, it was it was it was a bear year for water utilities in 2023.
But I think three most important things we can do to make sure we're water quality is the most important thing on our operating list, continue investing at that three times depreciation rate and keep growing that dividend. And I guess the fourth thing is making sure our customer service stays outstanding investment class when you do those things in the long run, you create value for stockholders any good.

Angie Storozynski

Thank you. Thank you.

Operator

Davis Sandelman, Baird.

David Sandelman

Thank you, Jim. Pretty bright tomorrow as say questions.

James Lynch

Hey, David. Good morning. Thanks for joining us.

David Sandelman

I will fast fashion as it relates to business development, but I guess maybe a broader question is any updates on that that are noted, but it has the peak created an opportunity for you guys see more aggressive instead or I guess take a closer look at any ship them. It may have difficulty.

James Lynch

Yes, Davis, your we got about every third word there. You were cutting out on. Do you guys?

Martin Kropelnicki

I think I think I'm going to I'm going to answer a question that I think you asked or at least I'll rephrase the question for Marty Davis. It sounded like you said, would keep us out there. If we took a look at the business opportunities that are also out in the market right now that we may be perceived pursuing, how are we considering the potential peak U.S. liability? And is that coloring our a desire or interest in some of those potential opportunities.
But you can hear that question that's in club, but let's say, as the bank funding blew it out because it was not the right question, David.
Again, there's type of business for that.
Well, as I say, we're in a great area. So I'm not answering questions.
Yes, you know, I think obviously, the cost of capital has gotten a lot more expensive. And from a business development standpoint, we haven't we've seen maybe a little bit of a slowdown and things that go into our pipeline from a business development standpoint. But our business development team continues to be very, very busy. As Jim as Jim mentioned, now the stuff we've got going on in Texas and other things we're doing in other states, um, so I think as you know, the P fostering, I think the smaller systems are a struggle to be in compliance.
And you think about for us, there's 100 wells, it's $250 million, and we're fairly good at implementing that type of treatment. We're very fast and we tried to keep our overhead fairly low on a smaller system, doesn't have access to capital or they don't have the technical resources on site to figure out what the treatment should be is going to affect their ability to operate. And I think that the broader operating issue is for companies like Cal Water are for essential or Aqua, our STW, our Middlesex, any of us that are publicly traded companies.
If you thought of compliance and the regulator finds the hell out of you or you end up getting to buy somebody right on. So no, we generally operate to the highest standards. Basel would be associated with that. When you're a municipal system, what's the recourse? And you think about the 60,000 systems out there that that fall under the purview of the EPA.
There's no way they can effectively monitor all those systems to make sure they're in compliance with PFO and keep us. And so I give the Biden administration credit for trying to push through the PFAS treatment kit, the EPM and flicker. I think that's really important. But yes, you'll have compliance lags on the municipal side where I don't think you're going to have that same problem on the investor-owned side.
Yes, I think I think as a result, of both Marty's observations on that. We do think that as with any new regulation that comes out, it will put financial stress on some systems and that may open up the market. And yes, if we believe we could assist the customers in those markets, we would be interested in taking a look at those systems to frame maybe, but even then Jim one of the things that happens we take over a system.
We had a liability dam, right? So if you look at some of the work we've done like in New Mexico where we've taken over troubled systems were fairly close very closely with the regulator to get the rates paid upfront before we buy them that we have an implementation time line. So we don't get pinged on the backside with these penalties and fines because I think in the water world, investor-owned utilities are the deep pocket for their regulators to define for all the audio of the time.

James Lynch

Yes, David, thank you.

David Sandelman

Thank you, Jim. Good years.
That was impressive. You can decipher that.

Operator

Thank you. And just right now, we don't have any raised hands. So I'd like to hand back over to the management for their final remarks, our InteLite.

James Lynch

Thank you. Well, everyone, thanks for joining us today. Obviously, there's a lot going on but at least one thing is off the list for 2021 General Rate Case that's in the rearview mirror.
Obviously, there's a lot of work to do on the tariffs and filing the required documentation with the commission to start the collection of the retroactive piece will be in a better position on our Q2 earnings call to talk about that and then in between now and then we'll be working on our 2024 general rate case and preparing for the State Supreme Court oral arguments on May 8.
So thank you for joining us today, and we look forward to talking to everyone really soon. Have a good day.

Operator

Thank you all for attending today's conference call. We hope you have a wonderful day. You may now all disconnect in this session.