Earnings Call Transcript - CWT Q3 2023

Operator, Operator

Good morning. My name is Christa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the California Water Service Group Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. Thank you. I will now turn the conference over to David Healey, Vice President Chief Financial Officer and Treasurer. You may begin your conference.

David Healey, CFO

Thank you, Christa. Welcome everyone to the 2023 third quarter results call for California Water Service Group. With me today is Marty Kropelnicki, our Chairman and CEO; and Greg Milleman, our Vice President, Rates and Regulatory Affairs Officer. Replay dial-in information for this call can be found in our quarterly results release, which was issued earlier today. The replay will be available until December 25, 2023. As a reminder, before we begin the company has a slide deck to accompany the earnings call this quarter. The slide deck was furnished with the Form 8-K this morning and is also available at the company's website at www.calwatergroup.com. Before looking at this quarter's results, we'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, the company strongly advises current shareholders, as well as interested parties to carefully read and understand the company's disclosures on risks and uncertainties found in our Form 10-K, Form 10-Q, press releases, and other reports filed from time to time with the Securities and Exchange Commission. I'm going to start by turning to slide 4, which states our values and priorities. Moving on to slide 5 third quarter financial highlights. As discussed last quarter, third quarter and year-to-date results primarily reflect the adverse impact of the delayed proposed decisions from the California Public Utilities Commission or CPUC on Cal Water's pending 2021 general rate case to set new rates, rate design, and regulatory mechanisms. Once approved by the CPUC, the general rate case accumulative adjustment will be retroactive to January 1, 2023. There is one change from our last quarter's discussion. The delay of the general rate case is now expected to move CPUC approval of the advice letter for the 2023 Drought Response Memorandum Account or DREMA operating revenue into calendar year 2024. We estimate the adverse impact of the delayed general rate case on third quarter 2023 operating revenue to be in the range from $14 million to $27 million, of which $5 million to $5.5 million is related to DREMA. Our estimate is based on the current positions of the parties to the California general rate case filing and consumption-driven regulatory mechanisms. As noted on slide 5, third quarter 2023 operating revenue decreased $11.3 million to $255 million as compared to the same period last year. The decrease was primarily from the $29.6 million decrease in WRAM and MCBA revenue as those mechanisms concluded on December 31, 2022. The decrease was partially offset by $13.7 million of 2023 general rate increases and a $1.8 million reduction in revenue deferral. Third quarter 2023 operating expenses increased $10.1 million to $211.5 million as compared to the same period last year. The increase was in line with expectations and as noted on slide 5 was due mostly to increases in water production costs, bad debt expense, costs from a reduction in revenue deferral, employee labor costs, and depreciation and amortization expense. Moving on to Page 6. During the third quarter of 2023, net income attributable to the group was $34.4 million, and diluted earnings per share was $0.60 as compared to net income attributable to the group of $55.9 million and diluted earnings per share of $1.03 for the quarter ended September 30, 2022. As discussed, the delayed California general rate case proposed decision had an adverse impact on net income attributable to the group. As noted at the bottom of the slide, I'm pleased to report the group's capital investments during the third quarter of 2023 were $96.9 million, which was a 25% increase from the same period last year. And now I'll turn it over to Greg Milleman to cover Slides 7 and 8.

Greg Milleman, VP, Rates and Regulatory Affairs Officer

Thank you, Dave. On Slide 7, you can see, as we've discussed in prior quarters, we have three unrecorded California regulatory mechanisms that we are tracking. Our practice is not to record revenue until the 2021 GRC amounts are known and approved by the commission. All of these mechanisms, as Dave said, are effective to January 1, 2023. We have the largest interim rates memo account that tracks the difference between interim rates and our final rates. We have the Monterey-Style Water Revenue Adjustment Mechanism, which tracks the difference between actual residential sales revenue and residential sales revenue at a single quantity rate. And then we have the drought response memo account, which tracks the difference in reduced sales revenues from conservation during a drought. This will stay open until California Governor Gavin Newsom declares the drought over, which could happen sometime in 2023 or 2024, depending on what happens with the weather in our state, it could stay open longer. Recovery from that will be by a separate filing. And as Dave indicated, those revenues will not be recorded in 2023. They will be recorded when the commission approves that filing. Turning to Slide 8. This gives you the financial impacts of the three recorded regulatory mechanisms for the third quarter based, again, as Dave said, on the current position of the parties in the 2021 GRC filing. We estimate the understatement of operating revenues during the third quarter to be in the range of $14 million to $27 million or $0.22 to $0.41 earnings per share. Something of note would be in the right before the subtotal where it says MRAM; you'll see that there are negative numbers. This is right in line with what we would expect for these memorandum accounts. When you go into the summer months, customers are using water in the more expensive third and fourth tiers, and the single quantity rate is more in line with the second tier. It's basically starting to annualize the numbers that we would expect for the year. Later on in the deck, we'll come across the slide that will show this same table with year-to-date results. You'll see, with almost three quarters of the year being completed, the numbers are coming in line with what we would expect on an annualized basis. With that, I will turn it back to you, Dave.

David Healey, CFO

Thank you, Greg. Moving to Slide 9, additional Q3 2023 highlights. As noted on this slide, 2024 operating revenue is expected to increase approximately $10 million from an increase in Cal Water's return on equity to 10.27% effective January 1, 2024. The increase was from the water cost of capital mechanism for the period from October 1, 2022, to September 30, 2023. We will discuss this in more detail later in the presentation. Also, Cal Water entered into an agreement with the California Department of Community Services and Development to help low-income customers access funds through the state's Low Income Household Water Assistance Program to pay monthly water bills. It's another example of our ongoing efforts to provide affordable water service to our customers. Moving to Slide 10, we present our earnings per share bridge, which details the changes from 2022 third quarter earnings per share to 2023 third quarter earnings per share. Moving on to Slide 11, year-to-date 2023 financial highlights. As we discussed earlier, due to the delayed California general rate case, we estimate the adverse impact on the first nine months of 2023 operating revenue to be in the range of approximately $60 million to $93 million, of which $16 million to $18 million is related to DREMA. Our estimate is based on the current positions of the parties to the California general rate case filing and consumption-driven mechanisms. As we discussed earlier, we expect CPUC approval of the advice letter for 2023 DREMA operating revenue in 2024. As noted on the slide, operating revenue for the nine-month period ended September 30, 2023, decreased $65.4 million to $580.1 million as compared to the same period last year. The decrease was primarily from a $48.8 million decrease in WRAM and MCBA revenue as those revenue mechanisms concluded on December 31, 2022, a $20 million increase in revenue deferral, and a $25.3 million decrease in billed metered revenue. These decreases were partially offset by general rate increases, a change in balancing accounts, and interest on the net WRAM and MCBA balances. Third quarter operating expenses decreased $5.9 million to $538.2 million as compared to the same period last year. Overall, third quarter 2023 operating expenses were in line with expectations. The decrease was mostly due to a $16.4 million decrease in costs associated with revenue deferral and a $3 million decrease in water production costs, which was partially offset by increases of $7.7 million in employee labor costs and $3.2 million of amortization expense and $1.9 million of property and other taxes. Moving on to Slide 12, financial results year-to-date 2023. For the nine-month period ended September 30, 2023, net income attributable to the group was $21.7 million or $0.38 earnings per diluted common share compared to net income attributable to the group of $76.4 million or $1.41 earnings per diluted common share for the nine-month period ended September 30, 2022. As discussed, our year-to-date results reflect the temporary absence of 2023 California general rate case rate relief and revenue adjustments from regulatory mechanisms. As noted at the bottom of Slide 12, the group invested $274.1 million in infrastructure investments during the nine-month period ended September 30, 2023, which was a 23.4% increase from the same period last year. Moving to Slide 13, which is the year-to-date unreported California regulatory mechanisms details. It breaks out the revenue by the different regulatory mechanisms. Greg pretty much covered the details of these. So, I'm going to move on to Slide 14, which is our year-to-date earnings per share bridge which details the changes from year-to-date September 30, 2022 earnings per share to year-to-date September 30, 2023 earnings per share. And now, I'll turn it over to Marty to cover Slide 15.

Marty Kropelnicki, Chairman and CEO

Thanks, Dave. Good morning everyone. As we go through the fog of the delayed rate case and certainly having $60 million to $90 million of revenue we can't record or $0.93 to $1.45 a share that we can't recognize while we are waiting for the rate case to be approved makes things complicated. There are certainly some additional highlights I'd like to talk about for the quarter. First, as Dave just mentioned, our capital investment program. Year-to-date we're at a new high. We are on track going into the fourth quarter to have a record capital investment year for the group for 2023. I just want to remind everyone that this is really the basis and the foundation for which we grow future earnings. That continues to be strong. We've had a fairly mild summer out on the West Coast, along with a mild fire season, believe it or not, has been fairly mild as well, with the exception of the fires that were experienced in West Maui. Overall, we have about another four weeks of fire season so far knock on wood out on the West Coast. Things have been fairly tame and we look forward to getting fire season wrapped up this year and then planning for the 2024 fire season. Looking at the West Maui fires, albeit the amount of acreage burned was 6,753 acres, which is not much at all, especially in California when we've dealt with wildfires that have been in excess of 400,000 acres burned, they were very devastating. These fires took place in early August and were really a series of three fires that were started. It was really the kind of a perfect storm: a drought in the Hawaiian Islands, climate change making the area drier and more arid, combined with remnants of hurricane winds that caused the fires to really take off. In the upcountry, you had the Kilauea and the Alinda fires, which were close to our Pukalani system. In Central Maui, you had the Pulehu and Kihei fires, which burned about 3,200 acres. Then on the west side, you had the Lahaina fire, which was about 2,100 to 2,200 acres. While none of our systems were directly affected, we do own the Ka'anapali, the Kalaeloa, and the Pukalani systems. Things are very chaotic, and I'm very happy to report that our employees followed their training. We do a lot of training for wildfire and wildfire readiness. Our water systems performed very well. We've never lost pressure in our systems during the fire. We did our job in terms of helping our customers protect their property by keeping their systems wet and providing the fire hose to the fire department as they battled these fires. Likewise, we were the only potable water provider on the west side of Maui for several days after the fire. I just want to pause and give kudos to the team for following their training and doing an amazing job during a very chaotic and confusing time. I think we've all read in the press about the response from local government, which added to the confusion, but kudos to the team in Maui for doing such a great job. The liquidity in the company remains strong. We maintained $69 million in cash, of which $34 million is restricted. We have short-term borrowing capabilities of $485 million. That's significant, while we're waiting for the general rate case decision. There's no crunch on liquidity at the company. With our capital program, the way it's going, we don't see that slowing down anytime soon. We did not sell any shares in the at-the-market or ATM program that we currently have in place. We don't anticipate selling shares probably for the rest of the year, and we'll see what the needs are as we go into 2024. We've increased cash and cash equivalents to $32.8 million from the collection of WRAM and MCBA balances. We wanted to point that out because there were some analysts concerned about the collectibility of the WRAM when it went away. We have continued to collect that cash, which has clearly helped enhance our cash position year-to-date and during the third quarter. The other noteworthy item in the quarter is when you look at the third quarter of 2022, we had a $9.3 million unrealized loss on non-qualified benefit plan investments. This year for the same period, that was a positive $700,000. You see the market go from what was really bad last year to where these assets have stabilized and become more productive, adding $700,000 in other income and expense. Moving onto Slide 16. As Dave mentioned earlier, the cost of capital adjustment mechanism performed as it's designed. The marked period is from October 1 to September 30 in a given year and it tracks the Moody's utility bond index and the changes in that bond index. When a bond index changes more than 100 basis points, we're allowed to file for an adjustment to our ROE of 50% of the change. The change from October 1, 2022, to September 30, 2023, was 140 basis points. We have filed for a 70-basis point adjustment to our return on equity, which brings us to a 10.27% and an increase in our overall rate of return up to 7.46%, as the variable is in ratemaking. That's a Tier 2 advice letter that has been filed on October 13. We expect to get that approved here in early November and that gives us the remaining time of the year to program the changes into the tariffs and have it effective for October 1. As Dave mentioned, this will add approximately $10 million to our income going into 2024. Speaking of regulatory updates, I’m going to hand over to Greg Milleman to give you an update on the California general rate case.

Greg Milleman, VP, Rates and Regulatory Affairs Officer

Okay. Just for clarification, the cost of capital adjustment that Marty mentioned, he said effective October 1; it will actually be effective January 1. I think he unintentionally mentioned that. Moving right along with the California general rate case. The main point here is, as you know from the second quarter, that a second judge was added to our case. We have been getting information requests from the judges that are clearly demonstrating that they are working on the case and proceeding forward with hopefully the deadline that's currently set to complete it by December 31, 2023. Moving to Slide 18. These are the other regulatory matters that we are proceeding with. As you can see, we have an application in to increase our ability to raise capital by $1.3 billion to fund our capital program. We also are seeking recovery of expenditures that we incurred related to the drought through those expenditures through the end of 2022. Finally, we completed and filed a rate case in Washington to increase our company revenues by $2.1 million that became effective on July 28, 2023. Moving to Slide 19, again back to you Marty.

Marty Kropelnicki, Chairman and CEO

Yes. Thanks, Greg. In terms of PFAS regulation and what's happening, certainly, there's been a lot of press over the last quarter about the settlement discussions that have been underway with the polluters, and while no final settlement has been reached, there has clearly been a lot of activity. For us, there's really no change in our PFAS program. We have a memo account on file with the commission that allows us to track our incremental costs associated with PFAS testing and then we've filed an application to modify that advice letter to allow us to track capital as well. The significance of that is it allows us to start to work early and make the investments, and when the regulations ultimately come into play and get approved, we can apply for recovery. I also want to point out that the $200 million that we estimate as being our capital needs to treat PFAS and the systems that we operate is incremental to the capital program that we talk about. So the slides that we put in this deck are part of the rate case capital that we planned during the ordinary course of business. Something like this, when we have a change in regulation that requires incremental capital, is just bad. It's incremental to the capital spending that we show in the rate case. Hence, we track it through the advice letter process. Moving to Slide 20, you'll see where we are kind of year-to-date at $274 million. Again, that's a new nine-month high for the company, and we are on track in the fourth quarter for a record capital investment year. Again, overall we don't see the capital needs slowing down anytime soon. Anything that's used for PFOA or PFAS treatment will be incremental to the numbers that you see on the slide. Likewise, this slide will get trued up when we get the final decision from the CPUC. The slide is based on what we've asked for in the rate case and also what we have actually spent over the last couple of years while going through the rate case process. Looking at Slide 21, this investment flows through to our rate base. This is what our forecasted rate base looks like based on the current assumptions. This will get trued up when we have a decision from the commission based on the 2021 general rate case. So going to Slide 22 in summary: obviously, we're very happy that it's been a mild fire season and we didn't sustain damage to our systems in West Maui. The cost of capital adjustment mechanism has put our ROE starting in January 1 to 10.27%. We haven't had an ROE above 10.2% in at least the last couple of decades. CapEx continues to remain strong and there are infinite places to put capital. So, on the capital side of the business, things are going well. As I mentioned earlier, the fog of the delay in the general rate case can be very frustrating. The revenue shortfalls we are experiencing are due to the temporary absence of regulatory mechanisms. We anticipate recognition of that revenue and those mechanisms when we have a decision from the California Public Utilities Commission. Like Greg, I'm encouraged to see that the rate case is being worked on. I also know it's very frustrating because we have to wait for administrative delays, which causes a lot of confusion in the financial reporting. The current deadline for the commission that they have on file to conclude our 2021 general rate case is December 31, 2023. Hopefully, we will be near the end. In addition to that, as we work to answer their questions on the 2021 rate case, we have been busy working on the 2024 rate case, which is going to be a significant effort within the company. It involves thousands of pages of documentation and testimony that gets filed. The team has been busy working on that. Obviously, we are pushing forward with our PFOA or PFAS programs to treat the wells that we have in our service territory that may show trace elements of those chemicals. Krista, with that we will open up for questions, please.

Operator, Operator

Certainly. Your first question comes from the line of Davis Sunderland from Baird. Please go ahead.

Davis Sunderland, Analyst

Hey, guys. Good morning and thank you for taking my question.

David Healey, CFO

Good morning, Davis.

Davis Sunderland, Analyst

Just going through the slide deck I noticed there is no update on the business development pipeline. I just wanted to ask in this regard, it's simple: the given the update, share maybe a difference in how you guys are looking at this going into 2024 or any thoughts there?

Marty Kropelnicki, Chairman and CEO

No. Actually good question, Davis. No change in how we look at 2024. The business development pipeline continues to be very strong. The only real activity that we had in the third quarter was that we closed on the Stroh system and we previously announced that. With the additional disclosures we wanted to put in this deck associated with the overhang of the rate case being delayed, we just didn't think there were a lot of substantial changes in the last 90 days that we and there were no new announcements during the last 90 days of that Stroh's system closing. We didn't want to use the space right now. We thought that space for this discussion was better served talking about what are the effects of the delayed rate case on both the revenue and EPS line.

Davis Sunderland, Analyst

Got it. And that was very helpful. Thank you very much. And then my only other question is just on the CPUC filing for $1.3 billion in equity and debt. Any estimates on when this specifically comes back, or if there would just be a continued trend in deployment and maybe other changes due to the rising rates environment? I guess any other thoughts there would be helpful. Thanks, guys.

Marty Kropelnicki, Chairman and CEO

Hi Greg, you want to take that one?

Greg Milleman, VP, Rates and Regulatory Affairs Officer

I heard part of it and that's the timing. An application like that generally takes somewhere between six to twelve months to process. It's usually very non-controversial, but the commission has a process that they need to follow.

Marty Kropelnicki, Chairman and CEO

Yeah. And I'll come back on the second part of your question, Davis. You saw the cost of capital mechanism do what it's designed to do. Frankly, I believe the cost of capital mechanism is very unique to California. I'm not aware of other states that have a cost of capital adjustment mechanism. So when we're in an increasing interest rate environment, that mechanism has helped. This is the second time, right? We had a second step-up on our ROE from the increasing interest rate environment. So, the application itself, we filed this in the ordinary course of business. It's basically a shelf similar to the shelf that we file with the Securities and Exchange Commission. The commission is authorizing us to sell more debt and equity for our needs in terms of financing our capital program and running the company. It's an administrative step with the commission that they approve it, and then we have to have a shelf on file with the SEC. It's not an indicator we're going to go out and do a great big stock deal tomorrow or sell a bunch of new debt. It's basically used for the financing needs of the company, as we continue to grow our rate base and have increasing rate base needs, and then again, I would just want to highlight that that cost of capital adjustment mechanism is working the way it's designed to work. I think that's kind of a real benefit of California regulation in that we don't have to wait a couple of years to file for an increase in ROE, given the increasing interest rate environment. We're allowed to adjust that every year based on the change in that Moody's utility bond index.

Davis Sunderland, Analyst

That's very helpful. Thanks for your time, guys. I appreciate it.

Marty Kropelnicki, Chairman and CEO

Thanks, Davis. Have a good day.

Operator, Operator

Your next question comes from the line of Jonathan Reeder with Wells Fargo. Please go ahead.

Jonathan Reeder, Analyst

Hey, good morning Marty and team. How are you guys?

Marty Kropelnicki, Chairman and CEO

Hi. Good morning, Jonathan. How are you?

Jonathan Reeder, Analyst

Not too bad, just getting into the swing of earnings now. I know you made the filing to increase the ROE under the water cost of capital mechanism. Have any intervenors opined on that increase, or by what date must intervenors weigh in if they want to?

Greg Milleman, VP, Rates and Regulatory Affairs Officer

Yeah. Jonathan, no one has intervened at this point in time. We filed it on October 13 and the intervenors have 20 days, which would be November 3rd or 4th.

Jonathan Reeder, Analyst

Got you. Okay. And Greg, that's the Tier 2 advice letter correct?

Greg Milleman, VP, Rates and Regulatory Affairs Officer

It's a Tier 2 advice letter where the Water Division approves it. They ensure that we followed the rules of the water cost of capital adjustment mechanism in our approved tariffs, and they also verify that we did the math correctly. But that's all there is to it.

Jonathan Reeder, Analyst

Got you. Okay. Can you talk about maybe the strategy for the next cost of capital application? I believe it would be due to be filed next year. Is there interest in trying to extend the current parameters, given the 2022 to 2024 application just recently got a final order?

Greg Milleman, VP, Rates and Regulatory Affairs Officer

We are currently discussing that with the other three water companies that are also supposed to file on May 1, 2024. At this point, we haven't settled on a strategy.

Jonathan Reeder, Analyst

Okay. All right, I think that's it for my question at this point, as we continue to await the PD. It sounds good if the ALJs are coming back to you guys for information requests. It's consistent with them certainly working on the case, but hopefully buttoning it up. So good luck with that.

Operator, Operator

Your next question comes from the line of Angie Storozynski from Seaport. Please go ahead.

Agnieszka Storozynski, Analyst

Thank you. I would like to refer back to that slide that illustrates the year-to-date results alongside what they would have been if the commission had made a decision, specifically Slide 13. Could you clarify why there is such a significant range for the first line for IRMA, $1.01 million compared to $0.5 million? That's quite a large difference. What accounts for this range? I understand there is a partial settlement in the case, but I would like to know why this range exists.

Greg Milleman, VP, Rates and Regulatory Affairs Officer

Certainly. The partial settlement really was basically on rate design matters. It did not address any of the capital projects that we included in the program and it did not address the disputed O&M expense items that we had in the case. The high range is what we filed in our application that would be our position. The low range is what the consumer advocates group felt we should achieve. So that's the reason for the range. The settlement was not a lot of items settled and it was not a lot of revenue requirement and, of course, basically no revenue requirement items settled.

Agnieszka Storozynski, Analyst

Okay. I'm sorry for jumping in, but regarding the filing that allows for the issuance of both equity and bonds, can we assume that the equity portion aligns with the permitted equity ratio? Essentially, this would mean that approximately 53% of that would be equity.

David Healey, CFO

Yes, that's a good assumption.

Agnieszka Storozynski, Analyst

Okay. And then lastly, what is the year-to-date impact associated with the performance of your nonqualified pension funds? Perhaps not year-over-year, but what is the absolute number?

David Healey, CFO

I think we have the details in slide 15. Are you referring to where we have the unrealized loss in 2022 versus the unrealized gain in 2023?

Agnieszka Storozynski, Analyst

I understand. Those figures are not year-over-year comparisons but actual numbers. That's clear. Additionally, while we are still awaiting the GRC decision, you likely have insight into the high return on equity. This year, you increased the dividend by a modest 4%. I'm assuming this was just a temporary situation. Should we anticipate that future dividend increases will return to the historical pattern, or are we now in a different interest rate environment that might limit dividend growth moving forward?

Marty Kropelnicki, Chairman and CEO

No. Our overall strategy, Angie, is to keep our payout ratio between 50% to 60%. We have stayed well within that range. With the growing capital program, there's always the need to finance that program, and when you pay a dividend, it takes away from your ability to help pay for that program. Nonetheless, I think we recognize that we are a total return type of stock, and the company has had a long history of increasing its dividend every single year. I would look at two things: the financials right now, and that's why I use the fog of the delayed rate case. It's very foggy; it's hard to see because, as you just pointed out, we have estimates and we're giving you a goalpost of where we think the decision is going to come out, but we ultimately don't know. When we book everything and get everything caught up from the delayed rate case, the fog starts to go away and you'll see what the financial statements look like. I do not expect the company to deviate from its policy of increasing the dividend every year. I think that will likely continue. The question is how much. And obviously, we are in a rising interest rate environment; your risk-free rate of return is now at 4% or above, depending on what duration bonds you're looking at and what type of bonds you're looking at. I'm also acutely aware that that compound annual growth rate or the CAGR number associated with our dividend growth helps drive stock valuation. It's hard to say right now. But look, I would anticipate a dividend increase next year consistent with the history of the company for the last 70 years. The question will be how much, and is the rate case concluded? I don't think we're prepared to say more on that right now. But history will repeat itself with Cal Water. It's just a question of what size increase it will be.

Agnieszka Storozynski, Analyst

Okay. I know that I promised that was the last question, but now just one more. You guys did a couple of acquisitions. So the question I basically have is: is that strategy going to continue in this higher financing environment? Is there more of a refocusing on organic growth? Again, that's a question I think we hear from investors across the utility space. As you said, PFAS would potentially give you this incremental organic growth. But strategically speaking, is there a shift towards organic growth as opposed to M&A?

Marty Kropelnicki, Chairman and CEO

Yes. I would refer you to our annual report for this year. It's certainly been a challenging market over the last 18 months to two years. Two years ago, we could borrow money at less than 0.5%, and now our borrowing rate is around 6.5%. We are rated A+ stable, which indicates that the cost of capital is increasing. This may lead to a shift in the landscape for buyers and sellers. However, we've always focused on value when it comes to our acquisitions. Even though deal activity might slow a bit, we will continue to seek systems that we can integrate into our platform, enhance service, and potentially attract new investment into areas that may not have seen enough funding. I'm still optimistic about M&A, although I believe it may slow down somewhat. Regarding the earlier question posed to Dave, we did not present that slide this quarter because we only closed one system, the Stroh's system in Washington, which involved about 900 connections. This doesn't mean our pipeline has diminished; it simply means we haven't had any new announcements in the last 90 days. Our business development team is strong, and as some of you may have noticed, we promoted Shilen Patel to the position of Chief Development Officer. His main focus will be on finding strategic deals that are beneficial. We are navigating the complexities of the delayed rate case, but we have a robust balance sheet. Often, tougher market conditions reveal better opportunities, so we will actively seek out prospects and continue pursuing them.

Operator, Operator

We have no other questions in the queue at this time. I will now turn the call over to Marty Kropelnicki, Chairman and CEO for closing remarks.

Marty Kropelnicki, Chairman and CEO

Great, Christa. Thanks everyone for calling in on the call today and thanks for staying with us as we go through this delayed rate case. Hopefully, we are getting to the end here, as Greg mentioned, and we can get this thing wrapped up because certainly as we go into 2024, we have some big things we want to accomplish. That's it for now. We'll look forward to reporting our year-end results at the end of February. Until then, please be safe, and we'll look forward to talking to you really soon. Thank you.

Operator, Operator

This concludes today's conference call. Thank you for your participation and you may now disconnect.