Ladies and gentlemen, thank you for standing by and welcome to the California Water Service Group Q4 and year-end 2022 earnings call. I would now like to turn the call over to Tom Scanlon, Corporate Controller. Please go ahead.
Thank you, Mandy. Welcome everyone to the 2022 year-end Q4 earnings results call for California Water Service Group. With me today is Martin Kropelnicki, our President and CEO, Thomas Smegal, our Vice President and Chief Financial Officer, and Greg Milleman, our Vice President of Rates and Regulatory Affairs. Replay dial-in information for this call can be found in our year-end earnings release, which was issued earlier today. The replay will be available until May 1st, 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 an 8-K yesterday afternoon, and is also available at the company's website at www.calwater.com. Before looking at this year's results, we'd like to take a few minutes to cover forward-looking statements.
Because these statements deal with future events, they are subject to various risks and uncertainties, and the actual results may differ materially from the company's current expectations. The company strongly advises all current shareholders as well as interested parties to carefully read and understand the company's disclosure 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 want to start by pointing out note 16 in the Form 10-K the company filed yesterday. During the Q4 of 2022, the company identified an immaterial error for regulatory liability and corresponding decreases to operating revenue and deferred income taxes that were not recorded in 2019. This is associated with customer refunds. The error does not impact customer billings or cash refunded to customers.
The company re-corrected the error in the financial statements through a restatement of opening retained earning balance to the year ended December 31st, 2020. For more details, please see the filed 10-K. I'm gonna pass it over to Tom Smegal.
Thanks, Tom Scanlon, and good morning, everyone. I'm going to walk through, as I usually do, the results of our full year and our Q4 . I'm gonna start on page five of the slide deck, which is a table of our financial results. Starting at the bottom of that table are EPS for the year went from $1.96 in 2021 to $1.77 in 2022, a decrease of $0.19. Our net income attributable to California Water Service Group declined by $5.1 million or 5.1%.
The capital investments I do wanna highlight, we'll be talking about that a little bit on the call today, increased $34.6 million to a new record of $327.8 million of CapEx for the year. to try to describe the full year financial results on the next page, remember that the big impact to the year that we've had is an $11 million unrealized change, negative unrealized change in the valuation of our non-qualified retirement plan assets. That was the big impact for the year. Obviously, it's also the third year of the California General Rate Case cycle, and typically in that third year, we see that rate increases don't keep up with the operating expense increases, and that was certainly the case, here in 2022.
I wanna jump then to the next slide and talk about the Q4 on slide seven. In the Q4 , we did see, and I know we talked in the first three quarters of the year about our unbilled revenue. We did see that unbilled revenue bounce right back up to where we had expected it to be as we, as we talked about. So the quarter was much better than the Q4 of 2021. Our EPS for the quarter was $0.35 per share as compared to $0.07 per share in 2021. The net income for the quarter in 2022 was $19.6 million. That's an increase of $16.1 million.
As I said, and flipping to slide eight, the primary driver there was the reversal of the unbilled revenue. You saw that we had an increase of $11.1. Overall, for the year, we had an increase of about $1.7 million in unbilled revenue. That's fairly typical for us to have anywhere from positive $1 million or $2 million to negative $1 million or $2 million. That usually washes out with that factor. We did, again for the quarter, see increased operating expenses for a variety of reasons, and we continued to see a little bit of general rate increase associated with that GRC step increase that we got at the first of the year in 2022.
The bridges describe those items that I just talked about, and I'll leave those for you to look at. Again, the big factors on the year is the mark-to-market. The big factor on the quarter is the increase in the in the unbilled, getting that back to normal. We have a lot of regulatory matters to report on. We have Greg Milleman here with us, and I'm going to start with Greg talking about our California cost of capital case.
Thank you, Tom. On page 11, we discussed the cost of California cost of capital. There's really not much to report since the last quarterly report. There is no new news from the Commission. As of today, the following Commission process, the earliest that we could see a final decision would be April of 2023. I'll turn it back to you, Tom Smegal.
Thank you. Thank you, Greg. Because of the delay in issuing a decision, the company can't determine whether the commission is factoring in changes in market conditions or other reasons for reviewing the cost of capital for this long. We really can't say where the case is in terms of the timing, as Greg mentioned, as well as the outcome. As we've been talking about on the third bullet there on slide 11, given the success of our financing program, we know that we had lower cost of debt that was in the application. We don't yet know whether the commission would apply retroactivity to the eventual cost of capital decision.
We've seen and we've talked about a few things that lead us to conclude that that is not probable, given the facts and circumstances that we have right now. If the Commission were to go back to the beginning of 2022, we would expect that the re-reduction in cost of debt alone would be an $11 million annual negative impact for the company. That would be reported in any current period when we do see a final decision from the Commission if they go retroactive. Greg, turn it back to you for the rate case update.
On slide 12 is the California General Rate Case update. As of today, the decision is two months late. There is no new news on when we will see a proposed decision. However, since the decision is late, we have opened an interim rates memo account that will allow us to track the difference between the current rates and the final rates that come out of the decision, which will be effective or which is effective January 1st, 2023. Additionally, we received approval to increase rates in most of our districts by 4% that we will commence starting April 15th, 2023. Moving on to slide 13, with a focus on decoupling. It's a reminder that at the start of this year, we are no longer decoupled, so we will be back to pre-2008 conditions.
There will be annual because of there is no decoupling, there'll be annual variability in the sale and production, the water sales revenues as well as the production costs. We knew that was coming, so to mitigate this in our 2021 rate case, we addressed it primarily by shifting more recovery at fixed cost to fixed service charge of more of our revenue to fixed service charge. Also, use more realistic water mix sources, water mix from various sources, to have a more realistic water production costs. I'll turn it to you now, Marty.
Great. Thanks, Greg. As we talked about, in the last conference call at the end of the Q 3 , Governor Newsom did sign in California since the 30th, a new law asking the CPUC to reconsider decoupling, which was a big win for the water industry, the investment on water industry in the state of California. Shortly after that law was signed by the governor, the California Public Utilities Commission filed a motion to dismiss our California Supreme Court case based that it was now null and void based on the new law signed by the governor. We disagree with that notion, and I'm very happy to report that the courts dismissed the PUC's motion to dismiss.
We are moving forward with our case with the California Supreme Court, here during the Q1 of 2023. The case has been fully briefed, and we anticipate having oral arguments before the state Supreme Court, no later than mid-year this year. That court case is moving forward. I think all indications are going in the right direction, and we look forward to having our discussion with the courts here, sometime over the next quarter or so. Greg, you wanna go through the California tracker status for 2023 and the delayed rate case?
Certainly. Thank you. On slide 14, you will see various mechanisms or trackers that the Commission allows to track lost revenues and expenses. These will all become effective January 2023. All but two of them cannot be calculated until the 2021 Rate Case is finalized and the component parts and pieces are set by the final Commission decision. The first two items, however, the Incremental Cost Balancing Account and the Conservation Balancing Account, we settled with Public Advocates in this case on the component parts of those accounts. We're able to calculate those now. The other mechanisms, we'll need to get the final Commission decision before we can actually calculate them, the mechanisms themselves are not in dispute. I believe it goes to you now, Marty.
Yep. Thank you. I want to give everyone an update on where we are with the drought. If everyone has been following the storms during the Q1 of 2023, it's been a wet and wild winter in California. Having said that, you know, a storm really is a drop in the bucket. We had a lot of rain the first two weeks of the year as the atmospheric river hit the West Coast all up and down the state, which was good news from a water supply perspective. It filled up a lot of the reservoirs in Northern California, we had a very dry February up until this week, where we got a lot more snow and blizzard-like conditions in the Sierras.
I think as many of you know, groundwater levels rise very slowly to seasonal changes, and one storm really doesn't kinda change things. Snowpack is very, very healthy right now, well above 100%. The thing to really watch as we go into the spring is what happens to the snowpack during the month of April. If you remember, during April of last year, we lost the majority of our snowpack and melted quickly as the weather warmed up. That's the part that's really driven by climate change. The other thing I would say is that the economics of water in California haven't changed. You still have 40-plus million people, you're the largest ag base state in the Union, and you have a very strong industrial base, being the fourth-largest economy in the world.
People get really excited about the storms. We do as well. We're happy to see the rain. The reality is, we're far from out of this thing. The thing to really look at is kinda what's the effect of climate change longer term on the state. That's why monitoring that snowpack and how long that snowpack lasts for, will become really, really important. Conservation continues, and our customers did a good job. Some of you may have seen we put a press release out earlier this week that our customers had nine straight months of conservation savings. Overall for Q4 2022 was 8.2% lower than last year and 17% below adopted. Again, that's the work of the conservation team, all the conservation messaging taking place throughout the state.
Our drought expenditures for the quarter were about $500,000. They're reported in a memorandum account, so they're expensed in the period, but we're allowed to track them. Our total balance in that account since the beginning of the drought is just under $2 million as of right now. All eyes are on April to see what happens with the snowpack. Hopefully, we get more rain and more snow between now and then, but really, we have to see how long it lasts. I think that the big thing that has really changed kind of over the last year has been the heightened awareness of the issues with the Colorado River. While that doesn't have a per se direct effect on Cal Water, it does affect some of our wholesalers in Southern California who we get water from.
We will continue to monitor that and obviously, our drought efforts work hand-in-hand with our wholesalers to make sure we have enough supply for Southern California. There'll be more to come on the drought as we move into spring. Moving on to page 16, wanna talk a little bit about capital investment. As Tom said, you know, I think the silver lining to what has been a challenging year has been the capital investment. We had a new record of $328 million of total capital invested, which is very, very healthy. Frankly, better than what we thought we would do. Kudos to the procurement, engineering, and operations team for getting that capital in the ground. There are many supply chain challenges during 2022 that we had to overcome to keep that capital flowing.
Q4 capital spending increased, given the good weather conditions up until the first of the year. Also, we've had more capital being invested in our subsidiary companies. We think that's a very, very good sign as our business development endeavors continue to pay off, and we add new service connections in other states. We are putting more capital in those other states and bringing those service connections up to our standards. We expect an increase in capital expenditures and non-California utilities during 2023. Again, with our subsidiary companies, we expect that level of capital investment to continue to move up, albeit not as the size of California in terms of total dollars. As a percent, it increases, the capital expenditures and the subsidiaries are growing at a very, very healthy clip.
I'll come back and talk about that in just a minute when we talk about some BD exercises. If you go over to page 17 on the business development side, we have highlighted in yellow kind of what has changed since we last talked, and I'll just go through the changes here quickly. Keauhou in Hawaii, which is a wastewater management system, that adds 1,500 equivalent units or basically 1,500 customers to our wastewater base in Hawaii. That adds 24% to the connection base for our Hawaii operations. Up in the Pacific Northwest in Washington, we added Stroh's Water and Bethel Green Acres. They were approved by the WUTC in January of this year. That'll add 3% to the customer base for our connections in the state of Washington.
If you go down to the very bottom of the page, Lake Section, New Mexico, we announced in January 2023 a definitive agreement, and that is being filed with the New Mexico Public Regulation Commission. That'll add 5,000 connections or 58% to our connection base in New Mexico. We continue to have good luck on this business development side in growing our business outside the state of California, and we'll look forward to updating you on these business development endeavors as we move forward in 2023. Capital, Tom, and overview.
Thanks. I'll just give a quick update on our capital investment and rate base slides. On slide 18, we've shown the capital investment for 2022. We continue to achieve CapEx that is 3x our depreciation rate, that's now a total of seven years where we've been doing that pace of CapEx. You'll see that, remember, 2023 and 2024 are dependent upon the CPUC decision and direction that we get from the CPUC in California with respect to the 2021 General Rate Case. There have been no changes to slide 19. Again, that's our estimated regulated rate base, particularly as it relates to California. We're awaiting a ruling, as we talked about, that would determine what the regulated rate base is in 2023, as well as 24 and 25. Marty, I'll turn this back to you.
Great. I'm on page 20 for the wrap up and what's gonna happen during 2023 looking forward. First and foremost, as we talked about on this call, not a lot of new news on the cost of capital in the General Rate Case. We are waiting, as are most of the water utilities in the state of California that are regulated by PUC. That'll create some short-term regulatory uncertainty as we wait for the 2 key decisions. We continue to work with the Commission and we'll do everything we can to make those decisions out as quickly as possible, but ultimately the ball is in their court.
Likewise, as we go into the end of the Q1 , it means the financial reporting is gonna be a little bit more challenging because we are officially decoupled from decoupling, but you don't have a rate order that has all your mechanisms laid out yet, as Greg mentioned. Like we've done in previous year GRCs, where we have anticipated mechanisms and trackers that we think we'll, we will be using when ultimately approved, we will provide as much information on kinda both sides of the fence, so to speak, so you can see what the numbers are kinda pre and post based on what we think those trackers are gonna be. If we can just ask everyone to bear with us till we get through the two decisions.
Once the decisions, that'll clear a lot of it up. It will be a little choppy making sense of all this in the interim while we are no longer decoupled and waiting for a GRC decision that'll ultimately approve all the trackers as well as cap structure, cost of capital, et cetera. While we'll stay focused on regulation, clearly we're gonna continue making progress on business development. The business development team has been very busy. We have a very full pipeline. We'll also continue to stay focused on risk management and paying attention to our supply chain issues, drought and climate change issues that affect the company long term. We'll be publishing our third ESG report here over the next few weeks.
We look forward to sharing that with everyone and the progress we have made on our battles with climate change and what we're doing to ensure sustainability for our customers. Lastly, I wanna deviate a little bit and some of you might be thinking, 'Who in the heck is this Tom Scanlon guy, and what in the heck happened to Dave Healey?' Dave Healey retired as our corporate controller. Some of you probably saw the 8-K last year. It was a planned retirement. We're lucky to have Tom Scanlon. Tom has an undergraduate degree from finance from Marquette University in Wisconsin, an MBA from the University of Illinois. He is a CPA and has a strong background in financial reporting and construction management.
Tom has been our Director of Financial Reporting since 2010, he has been part of our succession planning process here at Cal Water. Certainly very, very well qualified and frankly, with a, with a strong background in construction accounting, he was a big add for us when we added him in 2010, since construction and getting capital grant is a big part of what we do. Tom, welcome. I also wanna note that Justin Starb was promoted to Vice President of Community and Governmental Affairs. Justin joined Cal Water in 2009. He was promoted to director in 2017 and became an officer of the company effective January 1st, with Tom Scanlon. Excuse me.
Justin has his BS in political science from Arizona State University, a Master's in Communication from Cal State Hayward. He's currently finishing up his Juris Doctor, which he expects to have in 2024. Likewise, you may have saw a press release from a couple weeks ago announcing Shawn Bunting has joined the company as our Vice President, General Counsel. Shawn will be replacing Lynne McGhee, who will officially retire at the end of this month after 19 years of service with the company. Shawn has been with American Water Works for 15 years, serving in several various senior leadership roles. Shawn has a Bachelor of Arts in Political and Criminal Justice from Gettysburg College. He has a Juris Doctor from the University of Pittsburgh School of Law. He's also a US Marine Corps vet.
Officially welcome to Tom, Justin, and Shawn. Lastly, I wanna close out by just thanking Lynne and Dave. We've been very blessed at Cal Water to have a smart, thoughtful, and creative leadership team. Although leadership changes are never easy because we all get used to working together, and this has just been a marvelous team to have together for the last number of years without having any changes. We also understand and we encourage people to go retire and enjoy life. One of the great things about working at a company like Cal Water is we do have excellent benefits and excellent retirement program.
as much as change is painful to see our good friends and colleagues go, it's a good thing because it gives people room to move up and succession planning is a core competency of management and the board here at Cal Water that we take very, very seriously. With Dave and Lynn, we just wanna say thank you for all you've done for us over the years. You've been a major part of our team. You will be dearly missed, and we wish you all the best in your retirement. With that, Bundy, we wanna open it up to questions, please.
The floor is now open for your questions. To ask a question at this time, please press star one on your telephone keypad. If at any point you'd like to withdraw from a queue, please press star one again. You'll be provided with the opportunity to ask one question and one further follow-up question. We'll now take a moment to render our roster. We have a question from the line of Angie Storozynski from Seaport. Please proceed.
Thank you. I wanted to start with, you know, the fact that the decoupling mechanism went away, but you are still under the conservation mandate. Again, I'm just trying to understand where the exposure is, right? Because under the conservation mandate, the sales volume or changes in sales forecasts is not something that should impact your earnings. Again, I'm just trying to understand the where is the sensitivity here, given the conservation mandate is still in place?
Sure, Angie Storozynski, this is Tom Smegal. Greg , if you could fill in when I get to the end of my knowledge here. We do have a filed account, one of the accounts that Greg Milleman mentioned. It's called the DLRMA, which is the drought lost essentially lost revenue memorandum account. That is something for the non-decoupled companies like an SJW or some of these, some of the other smaller companies. That's been in place with them for some years. It does allow us to track and record lost sales during a declared drought. We are in a declared drought right now.
The Governor Newsom declared the drought a couple of years ago, and we've obviously, we've mentioned that we're tracking the costs associated with that. If you're not decoupled, you do get to track lost revenue and potentially recover that later. There's a couple of things about that. One is that it's subject to a little bit of an earnings haircut. I think a 20 basis point reduction in ROE associated with that. The thing that is unknown at this time, because we've had such a wet winter to date, is whether or when the Governor might declare that the drought is over. There's obviously, as Marty mentioned, major water supply challenges in California, particularly in Southern California at the moment.
The Colorado River supply, we're not sure if and when the governor might declare the drought over. If and when that happens, that account would no longer track the lost revenue. Greg, do you have anything to add to that?
No. You hit all the relevant points, Tom.
Okay, I understand. Secondly, previously, I looked at the Q4 slides from previous years. You guys had this slide where you showed us, you know, the, I would call it a simplified math for your earnings. I understand that this year it's difficult given that you're waiting for, you know, at least two major decisions. Can you actually at least give us a sense, for example, what is the non-California rate base? How should we think about those other drivers, you know, as you typically have? Yeah, well, I know that a lot is unknown, at least what would help us estimate the earnings power for this year?
Yeah, I think that, we don't report in segments. from our file documents, it's a little bit difficult to get the non-California rate base. We've described the company as being somewhere between 90% and 92% of our revenue and our business is in California. that would tend to be about true with rate base as well, but I don't have the numbers in front of me, and I don't know that we describe them publicly. There is, you know, some of these calculations that are embedded in that number on slide 19, which is the rate base. I wanna say that that follows that pattern as well, where about 90% of that rate base, that's being shown there is projected rate base for 2023, 2024, and 2025 is the California rate base.
Mm-hmm.
I can't get into much more detail than that. There are a lot of systems and unfortunately, the regulations are different in all states. In some cases, we have projected rate base, in some cases, we have reported rate base. It gets a little complicated, but California is fairly obvious because it'll be written in the decision, what the rate base in California is.
Mm-hmm. Okay. Lastly, on the financing side, so you've been very active with acquisitions of assets. How are you financing those acquisitions? That's one. Number two is, what was the actual equity ratio at the California utility at the end of 2022?
The answer to the first question is that most of these acquisitions, if you look back to the acquisition slide 17, are relatively small. We've been funding those with the corporate cash that's obtained through retained earnings and the ATM equity program, as well as the lines of credit that we have. The biggest acquisition that is on the list currently is probably the Lake Section at the very bottom. We just announced that acquisition, so we actually haven't paid for it yet. That will come out of those sources later on. As far as the equity layer at California Water Service Company.
Yeah
I see Tom across the table with me with a calculator. We don't have that information published. We'll have to calculate that, and to get that out in another way. We don't have that information right now.
If I were to say that it's around 50%, would that be?
I think yes. I think as of the third quarter, that was trending upward. As you know, one of the issues in the cost of capital case was.
Yeah
... whether the, you know, whether the capital structure was appropriate. It certainly was getting close to 50% as of the Q3 , I remember calculating, but I don't have that number unfortunately for year-end.
Okay. Thank you, guys. Thanks.
Thank you.
Our next question comes from the line of Jonathan Reeder from Wells Fargo. Please proceed.
Hey, good morning, gentlemen. I was hoping.
Good morning.
I was hoping you could elaborate a little bit on the drivers of the substantial 35% increase in other operating expense. I think it was about $30 million higher than in 2021. Were there items in there that are not likely to reoccur or, you know, is that a good base to assume 2023 grows off of?
This is Tom Scanlon. I'll answer that. The increase in other operation expense, a good portion of that relates to a requirement of deferral based on accounting guidance that we look at the future and estimate the collection of receivables. Anything that's over 24 months, we have to defer the revenue and costs. Each quarter, we reforecast that out, reverse it, and rebook it. Because of our anticipated collections, we've reversed out revenue and cost, and that's the large adjustment in the other operations expense. Also, we record our conservation expense in that category. Since we're at the end of our GRC, we have a conservation balancing account in which there's a number of programs that were accelerated during the final year of our rate case.
Again, note that the conservation expenses are covered by a balancing account. We also had an increase in bad debt expense or the reserve that we take for uncollectible accounts. Midyear in 2022, we were allowed to begin turning off service for non-payment, but we have a number of accounts that are under review and we can't it's gonna take some time to employ to turn off for non-payment. Those were the primary drivers of the increase in the other operating expense.
Okay. It sounds like a lot of that increase you have an associated kinda revenue impact as well or revenue increase.
That's right.
Okay.
That's correct.
That's right, Jonathan. Yeah.
Okay. Then, you know, I don't know if this is for Marty, but, you know, why did the board only go with a 4% dividend increase in 2023? I know it had been increasing at more like an 8% pace, the last three years, and the payout ratio on, you know, at least what should be a normalized EPS now or, I know 2023 is gonna be a little messy. It's still pretty low, you know, maybe around like 50%. Why did the dividend kinda not grow as fast as it has been historically?
Good question, Jonathan. You know, obviously we keep our payout ratio pegged within a certain band. Clearly it's just uncertainty right now, right? We're pending the Rate Case. We're pending the cap structure. You know, we think one of the most important things we do as a company besides serving customers is getting the capital in the ground, right? That's the benefits for stockholders as we're growing that rate base.
Given the uncertainty that we've seen at the Commission, we thought it was more prudent to have a lower dividend increase this year, you know, keep plowing that capital back into the ground. Obviously as things change, we'll reevaluate that. We've increased the dividend every year for the past 70 some odd years. I don't see us kind of changing directions from something like that, but we just felt it was time to be a little bit conservative until we get through these two hurdles here with the California Public Utilities Commission.
Okay. Thanks for that. Then just lastly, that Lake Section, New Mexico, acquisition, is there anything that you can, you know, disclose in terms of the purchase price or, you know, associated rate base amount there? Is that a deal that you expect to close in 2023?
We think it'll close in 2023. Obviously, we haven't filed it yet with the New Mexico Public Regulation Commission. When we do, we'll be able to talk more about the purchase price. I will say this, and Jonathan, you know how we are from a business development standpoint. We are value buyers. We're not interested in buying something at 3x, 4x or 5x rate base, right? We look at the cost per connection. We look at how much headroom or availability there is to invest in that system, to bring them up to our standards, et cetera. You know, keep in mind when we look at all our business development efforts, we have a pretty strong value slant on how we buy things.
I think once we file the application with the Commission, we'll be able to talk more about it, but until then, I really can't say what the purchase price is. Other than that, I would say it's not material at all to 5,000 connection system. They're not, you know, really big numbers here that are gonna really kinda dent anything.
Okay, great. No, appreciate those comments, Marty. Thanks. Good luck with-.
Thanks, Jonathan.
Our final question comes from the line of Davis Sunderland from Baird. Please proceed.
Hey, good morning, everybody, and thanks for taking my question, guys.
Good morning, Davis.
Wanted to ask about visibility into the current supply chain environment. I know you guys mentioned maybe having an impact that was greater last quarter than this quarter. It sounds like you overcame some difficulties, but just wanted to ask maybe specifically on lead times for lead piping or anything else significant, and if you think that's going to have any impact on the capital investment this year. I have a brief follow-up.
Sure. Well, I think I got supply chain tattooed on my arm, which has been a key focus of what I've worked on with the procurement team and the engineering team throughout the last two years. First, we're not buying any lead pipe. Let me just make sure the record's straight. There's no lead pipe. We, you know, we have seen substantial changes in lead time requirements for ductile iron, PVC, et cetera. Those look like they may have peaked in the third to Q4 . You know, ductile iron, you used to be able to order it, you know, four-six weeks out, and you'd be fine, and it'd show up at a job site. In some cases, it's up to a year lead time now.
Part of what happens behind that, and I've met with the majority of our suppliers, is they cannot ramp up production that quickly at their plant sites. You know, they try to match their supply with the demand and not have overcapacity because it costs them, and their margins are fairly tight. But we are seeing the suppliers ramp up production. It's been about 12 months coming. They started working on it early on, so we're seeing some of that production come into the queue, which is gonna speed things up. The other thing that has helped tremendously is we have been a consistent buyer of that pipe from our wholesalers.
Those relationships really make a difference when there's been a kind of a scramble and everyone out there trying to buy stuff that we've gotten bumped up to the top of the list because of our relationships and our consistency of ordering goods and services from certain vendors. I think we've peaked. I think it's starting to get better. We have seen a pretty big increase in some of the costs. You know, we've seen increases in our year-over-year inventory balance as well. As we found excess supply available, the team would grab it, and we would go store it. You know, I think it's easy to talk about on earnings call, but the reality is that the procurement team and the engineering team really did a fantastic job.
If you go back and listen to our earnings calls through last year, we were softly saying, "It's a tough year for capital. It's a tough year for capital. It's a tough year for capital." Clearly it was, but in the Q4 , we had a record Q4 , which resulted in a record year. The team has done a fantastic job. We are seeing price increases, obviously, with all the inflationary pressures as well. I think we're managing through it, and I hope we're through the worst of it. The indications I've seen so far is that it's starting to get a little bit better now. Barring any other major disruptive global events, I think we'll be on the downside of the problem, and hopefully things will start leveling off.
Thank you. That is helpful. My follow-up question would just be about the business development project pipeline. Obviously very exciting to hear about New Mexico, and just wanted to ask if there is anything in particular that to the extent you can share, of course, that you are looking into or weighing options as far as water versus wastewater or certain geographies that are more attractive. Any details there would be great. Thank you very much.
Sure. Very good question. Obviously, well, let me back up. At 50,000 feet, we've closed deals in all five states, including Texas. I think the market continues to be decent. The pipeline continues to be full. Sellers' expectations and buyers' expectations, that's always where the challenge is gonna be. We're doing deals on both sides, water and wastewater. You know, we've had very good growth in Texas. We've obviously in the state of California and in the state of Washington, it's been more kinda water systems. In Hawaii and Texas, it's been more wastewater systems. We're growing on both sides of it, and it just depends on where the market is and where the growth is happening.
As I mentioned to Jonathan's question, we're very kind of value-focused on a system. We're not interested in buying a system and overpaying for it, and then not having the ability to invest more capital into that system. That is a lose-lose situation for stockholders and for our company. We like to buy it on a value basis where we got room to invest, make capital improvements, bring somebody up to our operating standards, and then you know, the selling shareholder of the entity gets their buyout. We get the asset at a fair price, not an inflated price, but a fair price. Our stockholder gets the ability to invest capital in that system, which allows us to start generating our rate of return.
I'm, you know, still kind of bullish on the BD side. You know, obviously inflation's gonna be a factor in what happens with the economy in 2023, the BD team has been hot, and it's been hot in all five states. I don't see our momentum slowing down. Having said that, these aren't really big deals either, but obviously they're big deals to the subsidiary companies because they're growing exponentially with these deals. I think 23 is gonna be another decent year for business development barring any global catastrophic kind of changes in the market.
Thank you for the call.
Great. Thank you.
I would now like to turn the call over to Martin Kropelnicki for closing remarks.
Great. Thanks, Wendy. Well, obviously, as we move into the Q1 , all eyes are on the California Public Utilities Commission resolving the cost of capital and getting a PD out and hopefully getting a general rate case decision out sometime in 2023. The other two things we're focused on clearly is our Supreme Court case with the California Supreme Court on decoupling. As I mentioned earlier, everybody watch the snowpack. That's gonna be your key to answering questions about the drought, what happens to the snowpack during the month of April. With that, thanks for joining us for another year-end conference call. We appreciate everyone's support, and we'll look forward to updating everyone at the end of the Q1 , the end of April. Thank you very much. Have a great day.
Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.