SJW (SJW) Q2 2022 Earnings Call Transcript

SJW (SJW 1.83%)
Q2 2022 Earnings Call
Jul 28, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by, and welcome to the SJW Group second quarter financial results conference call. [Operator instructions] As a reminder today's conference is being recorded. I would now turn the conference to your host Mr. James Lynch, chief accounting officer.

Sir, you may begin.

James Lynch -- Chief Accounting Officer

Thank you, operator. Welcome to the 2022 second quarter 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 Andrew Walters, chief financial officer and treasurer. 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, 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 to our most recent forms 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission, copies of which may be obtained on our website.

All forward-looking statements are made as of today, and SJW Group disclaims any duty to update or revise such statements. You will have an opportunity to ask questions at the end of the presentation. And as a reminder, this webcast is being recorded, and an archive of the webcast will be available until October 24, 2022. You can access the press release and the webcast at our corporate website.

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

Eric Thornburg -- Chairman of the Board, President and Chief Executive Officer

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. It is my pleasure to be joined on this call by Jim Lynch, chief accounting officer; and Andrew Walters, chief financial officer. We thank our 700-plus employees for the passionate and commitment to clean drinking water and delivering world class service to customers, communities and each other.

They are the backbone of our local water and wastewater utilities. Our people responded head on to the challenges of 2022 and the second quarter. Drought. We're experiencing drought across all of our operations from exceptional drought in Texas to extreme drought in California as well as moderate levels in Connecticut and Maine.

Our people are managing water resources, operations and supporting customer conservation measures. They are also planning for system needs as we are all facing a warmer climate with more extreme weather events. Regulatory changes and delays. Revenues for the quarter were impacted as a result of a change in the approved water revenue adjustment mechanism in Connecticut to update the timing of consumption, resulting in a revenue shift from the second quarter of 2022 to the second half of the year.

In California, San Jose Water Company is expecting a decision in its 2021 California general rate case in the fourth quarter of 2022. As a settlement agreement filed with the California Public Utilities Commission last January been approved, revenues for the quarter would have been higher. We will discuss this later in greater detail. Supply chain.

We're seeing longer lead times for ordering pipe and other products necessary to invest in building and maintaining our water systems. Our scale and proficiency with advanced planning and procurement are making a difference in keeping our capital spending plan on track. Inflation. The water industry is seeing the impacts of inflation from fuel to labor.

Our leaders are working with their teams to blunt the effects of inflation by leveraging our scale and obtaining competitive pricing on key items while scouring budgets for opportunities to absorb increased costs without compromising on water quality or service or being good stewards of the environment. And interest rates. As the financial markets are changing and interest rates rising, our finance and accounting teams have worked to secure financing at very competitive rates. Our financial results in the second quarter are within our expectations, given these challenges and the lengthy general rate case and cost of capital proceedings in California.

We reaffirm our 2022 guidance of $2.30 to $2.40 per share. Andrew will speak to this and regulatory matters in greater detail. Now, Jim Lynch will discuss our financial results.

James Lynch -- Chief Accounting Officer

Thank you, Eric. Yesterday, at the close of business, we released our second quarter 2022 operating results, reporting net income for the quarter of $11.6 million or $0.38 per diluted share on revenues of $149 million. This compares to 2021 quarterly net income of $20.8 million or $0.69 per share on revenue of $152.2 million. Our quarterly operating results reflect the impact of a change at our Connecticut Water Utility, Connecticut Water Company, or CWC, and its approved water revenue adjustment mechanism or WRA, to update the timing of consumption, resulting in a shift of $3.8 million from the second quarter of 2022 to the second half of the year.

The total 2022 authorized revenue in Connecticut, including the $3.8 million second quarter shortfall will be fully recovered in 2022. In addition, our California Water Utility, San Jose Water Company, or SJWC, is expecting a decision in its general rate case or its GRC in the fourth quarter of 2022. In a separate proceeding, the California Public Utilities Commission approved interim rates, allowing the company to fully recover revenues authorized in the GRC proceeding retroactive to January 1, 2022. At terms of the GRC settlement agreement reached with the California Public Advocates Office, then adopted in the CPUC decision, quarterly revenues would have increased by an estimated $6 million or $7 million.

Also recall that in the second quarter of 2021, the company recognized a $3 million gain on the release of a holdback on our 2017 sale of Texas Water Alliance or TWA. No similar gain was recorded in 2022. The change in diluted earnings per share for the quarter was primarily driven by cumulative rate increases of $0.27 per share, a $0.25 per share production cost savings due to lower customer usage and $0.07 per share from an increase in California surface water production. These increases were offset by production cost increases of $0.24 per share, a decrease of $0.24 per share due to lower water consumption, a $0.16 per share decrease as a result of changes in the WRA in Connecticut and $0.09 per share related to the TWA holdback release that was recognized in the second quarter of 2021.

Turning to our comparative analysis of revenue for the quarter, the $3.2 million decrease was primarily attributable to $7.5 million in cumulative water rate increases and $400,000 due to new customers, offset by a $6.6 million decrease in customer usage and a decrease of $4.6 million related to Connecticut's WRA mechanism. As noted during our first quarter earnings call, in California, we are operating under a mandatory call for conservation declared by Valley Water, our wholesale water supplier. The declaration calls for a 15% reduction in 2022 water consumption as compared to 2019. Andrew will discuss the regulatory mechanisms in place to help manage the drought impact in his comments to follow.

Water production expenses decreased $1.3 million compared to the second quarter of 2021. The expense decrease included $6.9 million in lower customer usage and $1.8 million due to a production increase in California surface water. These decreases were partially offset by $6.6 million in higher average per unit water cost and an $800,000 decrease in cost recovery balancing and memorandum accounts. Other operating expenses increased $4.4 million during the quarter, primarily due to an increase in depreciation expense of $1.7 million and a $1.9 million increase in general and administrative expenses, primarily due to increases in labor and group insurance costs.

The change in other income for the quarter reflects the 2021 $3 million TWA purchase price holdback, which I discussed earlier. The effective income tax rate for the second quarter was 17% compared to 14% for the second quarter of 2021. The effective tax rate increase was primarily due to discrete tax items. Turning to the first six months of 2022.

Revenue was $273.3 million, a 2% increase over the same period last year. Net income for the first six months of 2022 was $15.3 million or $0.50 per diluted share compared to $23.4 million or $0.79 per diluted share during the same period a year ago. Our year-to-date results reflect the impact of the previously discussed change in CWC's WRA to update the timing of consumption, which resulted in the shift gain of $4.6 million from 2022 year-to-date revenue to the second half of the year. Again, the total authorized revenue in Connecticut, including the $4.6 million year-to-date shortfall will be fully recovered in 2022.

In addition, had a decision in our California rate case been approved by the CPUC, consistent with terms of our settlement agreement with the California Public Advocates Office, year-to-date revenues would have increased between $12 million and $13 million. Also, the 2022 year-to-date results reflect a $5.5 million gain on the sale of nonutility property, whereas no similar sale occurred in 2021. In 2021, we recorded the $3 million gain on release of the TWA purchase price holdback, whereas no similar release occurred in 2022. The change in diluted earnings per share for the first half of 2022 was primarily due to cumulative rate increases of $0.50 per share, a $0.28 per share in production cost savings attributable to lower usage and a nonrecurring gain on the sale of nonutility property of $0.21 per share.

In addition, the increase in California surface water production added $0.14 per share and new customers added $0.11 per share. These increases were primarily offset by production cost price increases of $0.43 per share, an increase in depreciation of $0.23 per share, a $0.21 per share decrease in the net recognition of the WRA regulatory mechanism in Connecticut, and a decrease of $0.19 per share in customer consumption. In addition, general and administrative expenses increased $0.14 per share and cost recovery balancing and memorandum accounts decreased $0.10 per share. Lastly, the TWA purchase price holdback that was discussed previously resulted in a $0.09 per share gain in 2021, as I discussed earlier.

Our 2022 first half revenue increase was primarily due to $12.7 million in cumulative rate increases, $2.9 million in revenue from new customers and $754,000 in balancing and memorandum accounts changes. This increase was partially offset by a decrease in the net recognition of Connecticut's WRA mechanism totaling $5.4 million and a decrease in customer usage of $4.8 million. Water production expense increased $1.4 million in the first half of 2022. The increase in water production expenses was primarily due to $11.1 million in higher average per unit water supply cost and $1.2 million in cost recovery balancing and memorandum accounts.

These increases were partially offset by a $7.2 million decrease in customer usage and a $3.7 million increase in our California surface water production. Other operating expenses increased $7.6 million in the first half of 2022, primarily due to a $5.9 million increase in depreciation expense, $5.2 million in higher general and administrative expenses, including $1.6 million related to cost recovery balancing and memorandum accounts and taxes other than income taxes, which increased by $1.2 million. In addition, in 2022, the company recorded a $5.5 million gain on the sale of a nonutility property. The change in other income and expense was primarily attributable to the TWA holdback, which I discussed previously.

Turning to our capital expenditure program, we added $57.9 million in company-funded utility plant in the second quarter of 2022, bringing our total company-funded additions for the first half of the year to $101.6 million. Our first half cash flows from operations increased approximately $16.5 million over the same period of 2021. The increase was primarily due to an increase of $25.5 million in regulatory assets, primarily due to balancing and memorandum account activity. Partially offset by a decrease in general working capital and net income and adjusted for noncash items of $5.1 million.

In addition, taxes payable increased $2.7 million and payments of amounts previously invoiced and accrued, including the crude production costs decreased by $1.2 million. At the end of the quarter, we had $118.7 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 first six months of 2022 was approximately 1.44%. With that, I will stop and turn the call over to Andrew.

Andrew Walters -- Chief Financial Officer and Treasurer

Thank you, Jim. San Jose Water's Advanced Media Infrastructure or AMI application has been approved by the CPUC. The approval paves the way for infrastructure investments of approximately $100 million over the four years to deploy AMI. AMI tracks water usage and provides near real-time water usage data that will enhance customer experience and supports SJWC's commitment to preserving and protecting the environment.

This is an additional investment outside of the capital budget request in the GRC. We expect the majority of the investment to occur between 2024 and 2026. The 2022 to 2024 cost of capital proceeding for the four large Class A California utilities is pending before the CPUC. The decision is expected in the third quarter of 2022.

San Jose Water Company's 2021 GRC application for new rates in 2022 through 2024 is also pending before the CPUC. The settlement agreement between SJWC and the Public Advocates Office was filed in January 2022 that solves all issues in the proceeding. If approved, the settlement provides a revenue increase of approximately $54 million over the three-year period with an increase of approximately $25 million in 2022. The settlement also recognizes the need for continued investments in the water system to deliver safe and reliable water service, providing an authorization of a three-year $350 million capital budget.

Additionally, it further aligns authorized and actual consumption, particularly for business customers, addresses our water supply mix volatility and provides greater revenue recovery in the fixed charge. A decision is expected in the fourth quarter of 2022. With interim rates authorized, we will be able to apply the revenue adopted in the Commission's final decision retroactively to January 1, 2022. SJWC received authorization effective July 1, 2022, to increase revenue requirement by approximately $25 million or roughly 6%, the majority of which related to an annual increase in purchased potable water charges.

The groundwater extraction fee and purchase recycled water charges from its whole water wholesalers and the remaining to an advice letter project. In Connecticut, the Public Utilities Regulatory Authority authorized recovery of $10 million in completed projects through the Water Infrastructure and Conservation Adjustment mechanism. The increase in the WICA surcharge was effective July 1, 2022. The cumulative WICA is now 3.26%, which is expected to generate approximately $3.4 million in annualized revenues.

On January 8, 2022, PURA approved the acquisition of the assets of the Miami Beach Water Company in Old Line. This is a water system for a small beach community that serves approximately 120 customers, but has an estimated capex need in the neighborhood of $6 million that will be reflected in the future capital planning for CWC. A closing on the acquisition is expected in August. As Jim noted previously, revenues for Connecticut Water Company were adjusted to reflect current consumption patterns.

The table below highlights the differences between the previous revenue allocation and the updated revenue allocation. Our new $60 million Saco River Drinking Water Resource Center went online in June and is now serving our customers in the Bedford Saco division. Eric will speak more about our new facility. On July 1, 2022, new rates went into effect to support the generational investment in the Water Resource Center, which are expected to generate annual revenues of $6.3 million.

This was the second step in a multiyear plan that gradually raises rates in the division. The first step was an innovative rate smoothing mechanism approved by the Maine Public Utilities Commission last summer, the third step and last filing to reflect the operating cost of the new treatment facility is expected to be submitted in the second half of 2022. In June, Maine Water filed the second half of a two-part water infrastructure charge application with the Maine Public Utilities Commission for an additional WISC increase in the Skowhegan division. The first half authorized by the MPUC went into effect on January 1, 2022.

The second part is approved as filed, the WISC surcharge in Skowhegan would increase by an additional $50 million. The decision is expected in Q3. Also pending before the MPUC our general rate cases filed in February of four main water divisions for a total of $532,000. A decision is expected in the fourth quarter.

In June, the Public Utilities Commission of Texas approved a new water pass-through charge for Canyon Lake service area of SJWTX subsidiary. The decision retroactive back to March 1, 2022, is expected to generate more than $400,000 in annualized revenues. SJWTX now serves more than 25,000 water and wastewater connections between Austin and San Antonio and has service areas in three of five fastest-growing counties in the United States. SJWTX has more than tripled its customer base in the 15 years, providing service to about 72,000 people today.

With a diverse portfolio of water supplies, a growing wastewater business and continued additions to the customer based through organic growth and acquisitions. We remain optimistic about the prospects of SJWTX and the increased contributions to consolidated earnings. Drought conditions persist in California service area. The current level at Lake Elsman will likely support approximately 1.8 billion gallons in total production for 2022.

As shown in this chart, Lake Elsman is slightly below the five-year average and higher than in the same period in 2020 and 2021. This should bring total service water production in 2022, close to or equal to the volume in the GRC settlement. We are reaffirming our 2022 guidance to $2.30 to $2.40 per diluted share. Our guidance assumes CPUC approval of San Jose Water's general rate settlement agreement and contemplation of the four other divisional GRCs in May in 2022.

On April 6, 2022, Maine Water entered into a credit agreement with a commercial bank pursuant to an existing master loan agreement under which the Commercial Bank issued Maine Water, a promissory note on the same date to an aggregate principal amount of $15 million at a fixed rate of 4.54% due May 31, 2042. Proceeds from the borrowings were received on May 13, 2022 and on June 28, 2022, Connecticut Water entered into a note purchase agreement pursuant to which Connecticut Water sold an aggregate principal amount of $25 million, a 4.71% senior notes due December 15, 2022. The closing of the note purchase agreement is expected to occur in December 2022 and is subject to customary closing conditions and regulatory approval. And finally, on July 14, 2022, SJWC entered into a note purchase agreement with certain affiliates of New York Life, Metropolitan Life, Northwestern Mutual and John Hancock.

Pursuant to which the company will sell an aggregate principal amount of $70 million of its 4.85% senior notes. The closing is expected to occur in January 2023 upon satisfaction of customary closing conditions. With that, I will stop and turn the call back over to Eric.

Eric Thornburg -- Chairman of the Board, President and Chief Executive Officer

Thank you, Andrew. Yesterday, we had the privilege of being in Biddeford, Maine to help dedicate Maine Water's new Saco River Drinking Water Resource Center. Joining us was Governor Janet Mills, local community leaders, regulators and many other dignitaries. They reaffirm my view that investing in drinking water infrastructure is vital to customers and communities and worthy of celebration.

The new center replaced an aging facility on the bank of the Saco River and I'm not exaggerating when I say aging. As the old facility went online in 1884 before electricity was available in Biddeford and yet has served the community exceptionally well over the last 138 years. The new resource center is safely out of the rivers flood plain and will reliably and efficiently deliver clean water to customers and communities in the region into the next century. I'm proud of how our Maine team worked with community leaders to build support for this generational investment, which has been a high priority for Maine Water from the day it acquired the Biddeford Saco Water System in 2012.

Due to the values of Maine Water and SJW Group, our team viewed the project as an opportunity to be a force for good and exceed expectations. An innovative rate smoothing mechanism was created and approved by regulators that is providing a three-year ramp to new rates that supports the $60 million project. At the end of three years, customers will still only be paying about $0.01 per gallon of high-quality drinking water. Sustainability and resiliency were at the forefront of the project, including relocation out of the flood plan, which is the main climate-related risk and an on-site solar array that will offset 100% of the energy needed to operate the facility.

The natural environment has been preserved and will be an educational resource featuring 257 acres of protected open space with plans for hiking trails, establishment of a pollinator garden and the restoration of Wetlands areas. The efforts of Maine Water and its project partners were recognized by the Institute for Sustainable Infrastructure with an envisioned Silver award, the first awarded to a project of this kind in the New England region. I'm proud of what our people have accomplished and their commitment to our core values of service, in the communities where we live, work and serve. Our environmental, social and governance or ESG scores continue to be strong.

We are at or near the top of the ISS ESG ratings among water utility industry peers. In addition, SJW Group has the distinction of having a gender balance board, an achievement that can be made by just 9% of the companies in the Russell 3000. With that, I will turn the call back over to the operator.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Richard Sunderland. Your line is open.

Richard Sunderland -- J.P. Morgan -- Analyst

Hi. Good morning. Thanks for the time today. 

Eric Thornburg -- Chairman of the Board, President and Chief Executive Officer

Hey. Hi, Rich. Thanks for checking us in today.

Richard Sunderland -- J.P. Morgan -- Analyst

Let's see the California cost of capital proceeding, could you just walk through functionally how you true up cost of debt? And that is, is that already filed in the proceeding? Or is there were a true-up when the final order comes out? Also curious if you have any thoughts on just sort of the direction of interest rates here and how that could feed into ROEs?

Andrew Walters -- Chief Financial Officer and Treasurer

Hi, Rich. This is Andrew. Excellent question. A couple of things that I'll highlight.

So once approved, the cost of debt will be part of the overall cost of capital, and it would be theoretically reduced at that time. The question that we have to understand before us is really when the timing of that will happen, whether that will be the timing of the decision or at some point earlier. So in terms of the interest rates and how that impacts the ROE, certainly, if anybody is listening and looking on around them at what is happening with interest rates, you would expect that there should be some additional thoughts that would go into your thinking on how you would address ROEs for utilities that are needing to fund their investments, compete for capital in the market, as well as, quite frankly, cover the cost of inflation in their existing systems. So how that gets baked in at this stage, it is part of the process, and we're hopeful that the CPUC will take those factors into account in their final decision.

Does that answer your question?

Richard Sunderland -- J.P. Morgan -- Analyst

No, that's great. Appreciate the comments there. Sticking with California, the GRC tracking 4Q now, do you have any insight into the timing change and just how the process is in form 4Q versus 3Q prior?

Andrew Walters -- Chief Financial Officer and Treasurer

Yeah, it's a great question. Our understanding is this really relates to the workload of the -- our partners at the CPUC. And so there's simply a delay due to that workload.

Richard Sunderland -- J.P. Morgan -- Analyst

That's easy enough. And one more from me while I'm here. The inflation backdrop, just curious if you could speak to any cost pressures you're seeing this year? And then, I guess, particularly with the rate activity, how that might flow through the various rate proceedings on a go-forward basis?

Andrew Walters -- Chief Financial Officer and Treasurer

Sure. So a couple of items to keep in mind. So for the historic test year states, there is no adjustment in those cost factors. And so that covers Maine, Texas, and Connecticut.

Texas, we're lucky to have sufficient growth that will continue to help us not only offset the cost increases, but also to provide growth in earnings per share. As it relates to California, the first phase is obviously to get the rate case approved. In the forward-looking years following that, there are adjustments that are provided by California for expenses, and those rates are to be determined, but they are tracking various indexes and it's not uniform rate, but the point is that it does give us an offset to the expense increases that we're currently experiencing. So as you kind of think about it from an overall perspective, we are absolutely experiencing expense impacts in our business.

Certainly, labor will be a place that has -- we've already seen impacts in that area, and we'll expect to continue to see impacts in that. As well as some of the expenses that are related to or associated with any of the energy volatility and then also metal. And that's really been driven. So pig iron in Ukraine has also driven expense increases in the pipe, but that probably is more related to our capex as it is to our O&M expenses.

Richard Sunderland -- J.P. Morgan -- Analyst

Got it. Very helpful. Thanks for the time today.

Andrew Walters -- Chief Financial Officer and Treasurer

Thank you.

Operator

Thank you. Our next question comes from Angie Storozynski of Seaport Research. Your line is open.

Angie Storozynski -- Seaport Research Partners -- Analyst

Yeah. Thank you. So Andrew, just one follow-up on the cost of capital. So what's the status? I mean, I saw that all of the Water Utilities asked oral arguments and that request was opposed by the interveners, but what's the status? Are you going to get those oral arguments?

Andrew Walters -- Chief Financial Officer and Treasurer

No, we're not successful being able to get those oral arguments.

Angie Storozynski -- Seaport Research Partners -- Analyst

OK. And then you mentioned that it's unclear when there's going to be a true-up in the cost of debt. Is this something new? Because I thought that it was -- I mean, it's a 2022 cost of capital proceeding. So I mean, that's typically is retroactive to January 1, 2022, now both for the equity and the cost of debt, you know?

Andrew Walters -- Chief Financial Officer and Treasurer

Yes, that's correct, Angie. At this point, that is the typical practice is to have a true-up at the point that it's decided for the year that it's supposed to go into effect. That includes both the cost of debt as well as the cost of equity.

Angie Storozynski -- Seaport Research Partners -- Analyst

And so you mentioned that you're hopeful that the final decision will have in this cost of capital proceeding, will have some recognition of the current interest rate environment. So is it fair to say that this proposed decision will not reflect the current market conditions, and it will just reflect the current record in this case, i.e., that we should brace for that to post decision?

Andrew Walters -- Chief Financial Officer and Treasurer

I think it's early to tell kind of where that will come out. Again, I wish that we would have like complete insight and be able to give you a complete view on how the thinking will be impacted. The baseline is that they are supposed to reflect what's in the record and that's what they follow. But obviously, there's quite a big difference of what's in the record of what we've asked for and what the advocates have asked for.

So as you are somebody that's looking at that and you think about the reasonableness of what somebody is asking for relative to the market conditions, you would expect that would take an impact on their decision process.

James Lynch -- Chief Accounting Officer

Yes. Angie, this is James. I would just like to remind you of one thing in that this is a forward-looking proceeding. And in the forward-looking proceeding, we estimated what future rate interest rate increases would be along with our future financing requirements.

And on Andrew's call, he mentioned that we had already locked in a number of our financing requirements for 2022. And so the real test here will be taking a look at how those rates compare to what is finally approved by the commission in the cost of capital proceeding over the next three years. So I think we've made some good progress in terms of aligning the proposed decision with where we are right now as it relates to interest rates, at least in this first year out.

Angie Storozynski -- Seaport Research Partners -- Analyst

But it's mostly on the debt side, right? I mean it's kind of tough to say what's the cost of equity. Is that fair?

James Lynch -- Chief Accounting Officer

Yes, that's fair, Angie.

Angie Storozynski -- Seaport Research Partners -- Analyst

OK. And then...

James Lynch -- Chief Accounting Officer

Angie, on the cost of equity, one thing just to keep in mind is there is a tracker in the cost of equity. And as interest rates are where they are, that is something that, while it's not impacting us now, it certainly would be something that would likely take effect if trends are where they are.

Angie Storozynski -- Seaport Research Partners -- Analyst

Right. And then just wondering -- I was just actually looking at your effective tax rate. And do you think that there will be some impact on your company from that proposed 15% minimum tax rate that looks more likely at this point? Would that change for instance, your financing plans plus equity needs, given any potential impact on operating cash flows?

James Lynch -- Chief Accounting Officer

Well, obviously, we're taking a look to watch as that minimum tax rate is kind of making its way through the regulatory process. And clearly, in some of our current operating utilities on an individual basis, we have rates below 15%. We also have rates that are above 15%. And what we're going to need to do is to see how our combined rate as a combined filer in the Federal -- for purposes of Federal taxes levels out relative to what ultimately gets passed by Congress.

Angie Storozynski -- Seaport Research Partners -- Analyst

OK. OK, I understand. And then lastly, on the GRC. So before you reflect it in your earnings, you have to have the final decision, right? I mean, this is the basis for any adjustments that you're going to make.

So that's where we need to track for. Any sort of -- any comments from either the commission or a proposed decision is not enough to reflect those changes as far as the balancing accounts for purchased water costs, again, we have to wait for the final decision?

James Lynch -- Chief Accounting Officer

That's right. And it would be a final decision. But remember, we do have that settlement and the settlement does address a number of the issues, including the full cost balancing account, which you're mentioning with regards to our production cost. And so we are expecting that that we get that decision at this point in the fourth quarter, and it really depends on the commission and their workload, as Andrew mentioned, as to when during the fourth quarter that occurs.

Angie Storozynski -- Seaport Research Partners -- Analyst

Again, we're clearly struggling with the quality distribution of earnings this year. So basically, we're assuming that there is just flat revenues for California in the third quarter year over year with those adjustments that you mentioned for Connecticut with this big quarter than happening in the fourth quarter?

James Lynch -- Chief Accounting Officer

That's correct. And again, I do want to emphasize that we are viewing this as a timing issue and nothing more.

Angie Storozynski -- Seaport Research Partners -- Analyst

Awesome. Thank you, guys. Thank you.

Operator

Thank you. Our next question comes from Carol Wallace of SJW Group. Your line is open.

Eric Thornburg -- Chairman of the Board, President and Chief Executive Officer

Yeah. Hey, Carol. I think that was a mistake. Yes, Carol is not -- she's with our organization. 

Operator

I apologize. So right now, I'm showing no further questions at this time. I'd like to turn the call back over to Eric Thornburg for any closing remarks.

Eric Thornburg -- Chairman of the Board, President and Chief Executive Officer

Thank you very much. Thank you, folks, for joining us today. We really do appreciate your interest in our company and support of it. We're really proud of our 770 employees across the country and all the great work they're doing to serve our customers and our communities.

And we look forward to sharing more about our successes in the quarters to come. Thank you very much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

James Lynch -- Chief Accounting Officer

Eric Thornburg -- Chairman of the Board, President and Chief Executive Officer

Andrew Walters -- Chief Financial Officer and Treasurer

Richard Sunderland -- J.P. Morgan -- Analyst

Angie Storozynski -- Seaport Research Partners -- Analyst

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