Title

Presentation

California Water Service Group misses on earnings expectations. Reported EPS is $0.33 EPS, expectations were $0.38.

Operator: Hello, and thank you for standing by. I would like everyone to be welcome to the California Water Service Group Q4 2024 and Full Year Earnings Conference Call. I would now like to turn the call over to our CFO, Jim Lynch. Please go ahead.

James Lynch: Thank you, Dustin. Welcome, everyone, to our fourth quarter 2024 results call for California Water Service Group. With me today is Martin Kropelnicki, our Chairman and CEO; and Greg Milleman, Vice President, Rates and Regulatory Affairs. Replay dial-in information for this call can be found in our quarterly results earnings release, which was issued earlier today. A replay of today’s call will be available until March 31, 2025. As a reminder, before we begin, the company has a slide deck to accompany today’s earnings call. The slide deck was furnished with an 8-K and is also available on the company’s website at www.calwatergroup.com. Before looking at our fourth quarter 2024 results, I’d like to cover forward-looking statements.

During our call, we 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. As a result, we strongly advise all current shareholders and interested parties to carefully read the company’s disclosures on risks and uncertainties found in our Form 10-K, Form 10-Q, press releases and other reports filed with the Securities and Exchange Commission. And now I’ll turn the call over to Marty.

Martin Kropelnicki: Thank you, Jim. Good morning, everyone. I’m going to give you a brief overview before we jump into the details. And I’ll just start off by saying what a difference a year makes. We started 2024 with delayed ’21 General Rate Case for California and that was financially very challenging for the company. And now we end the year in excellent financial position, setting a new number of highs on certain critical business elements, including revenue, capital investment from our infrastructure improvement plans, rate base growth and dividend growth. Adding our continued work on wildfire hardening, resiliency planning and sustainability and our proactive approach to emergency preparedness and response planning, and it really was one heck of a year.

I think as we go through the results here today, I believe you will agree that Cal Water accomplished a lot in 2024 under difficult circumstances. But by the end of the year, it has positioned us very, very well for continued success in 2025 and beyond. So Jim, with that, why don’t we jump into the results for the year.

James Lynch: Great. As Marty mentioned, we did achieve strong financial results in 2024. We benefited from both new rates and the new rate structure that was authorized in our 2021 California General Rate Case. You may recall that the CPUC issued our 2021 GRC decision in March of 2024. As a result, we also benefited from 2023 interim rate relief at the time the decision was issued. Beyond the 2021 GRC, we benefited from a lower cost water supply mix as a result of higher precipitation in many of our California service areas over the past couple of years. Looking at Q4, these benefits were partially offset by lower water usage resulting from cooler, wetter weather in December of 2024 compared to December 2023. Finally, I’ll note that in the fourth quarter of 2023, we recognized a significant amount of revenue that was deferred under our water revenue adjustment mechanism or our WRAM as well as benefits from the Tax Cuts and Jobs Act tax or TCJA, that did not recur in the fourth quarter of 2024.

Our operating revenue for the quarter — four quarter increased 3.6% to $222.2 million compared to the prior year Q4 operating revenue of $214.5 million. Net income for the quarter was $19.7 million or $0.33 per diluted share compared to $30.1 million or $0.52 per diluted share in Q4 of 2023. Now I’ll dive a little deeper into Q4 earnings as we look at the earnings bridge. As I noted, the increase in Q4 2024 revenue was driven primarily by $24.2 million or $0.45 diluted earnings per share increase in rates billed to customers as authorized in our regulatory filings and an increase of $5.5 million or $0.10 per diluted share in our Monterey Water Rate Adjustment Mechanism or our M-WRAM, due to lower high-tier water sales. This was partially offset by lower unbilled revenue totaling $8.1 million or $0.15 per diluted share due to lower December water usage and $19.4 million or $0.36 per share related to previously deferred WRAM balances recognized in Q4 of 2023 that did not recur in 2024.

Q4 2024 operating expenses were $189.9 million compared to $179.3 million in Q4 of 2023. This was an increase of $10.6 million. Following along on Slide 6, water production costs increased by $3.4 million or $0.06 per diluted share to $73.7 million, primarily due to an increase in wholesale rates and higher consumption. And income tax benefit decreased $9.9 million or $0.13 per diluted share to $3.9 million, primarily due to the timing of the annual TCJA tax benefit recognition. Turning to Slide 7. Our full year 2024 results benefited from the same regulatory mechanisms as the quarterly results. Annual operating revenue increased to slightly more than $1 billion in 2024 compared to $794.6 million in 2023. Annual 2024 net income was $190.8 million or $3.25 per diluted share compared to annual 2023 net income of $51.9 million or $0.91 per diluted share.

This represents $138.9 million or 267.6% increase in net income year-over-year. The 2024 revenue increase of $242.4 million was driven primarily by the cumulative impact of our 2021 California GRC decision, including 2023 interim rate relief and M-WRAM revenue totaling $123.9 million or $1.73 diluted earnings per share. In addition, 2024 results benefited $122.1 million or $1.53 per diluted share from higher rates and increased water consumption. Operating expenses in 2024 were $811.8 million compared to 2023 operating expenses of $717.5 million. Following along on Slide 8, this increase was primarily driven by higher water production costs of $22.2 million for $0.31 per diluted earnings per share due to an increase in wholesale water rates and increased water consumption.

In addition, operating expenses were impacted by higher depreciation and amortization of $10.7 million or $0.15 per diluted share due to new utility plant placed in service. Finally, income taxes increased $51 million or $0.25 per diluted share due primarily to higher pretax income. As a reminder, as a result of the Q1 2024 adoption of our 2021 California GRC decision, interim rate relief related to 2023 totaling $87.5 million of revenue and $64 million of net income was recorded in our 2024 operating results. This included $20.2 million of revenue and $13.6 million of net income that was attributable to the three months ending December 31, 2023. Turning to Slide 9. We continue to make significant investments in our water infrastructure to help ensure the delivery of safe and reliable water service.

Company capital investments in 2024 totaled a record $471 million. This represents a 23% increase over our capital investments in 2023. As a reminder, our 2024 capital investments and our estimated capital investments for the period from 2025 through 2027 do not include $226 million of estimated PFAS projects scheduled for construction through 2027. In addition, for the period from 2025 through 2027, our estimate of capital expenditures is predicated in part on the outcome of our 2024 GRC in California and normal capital needs in our other subsidiaries. We expect our annual capital expenditures to increase during the next five years due to the continuing need to replace and maintain our water infrastructure. Turning to Slide 10. You can see the positive impact that our record level of capital investments is having on our regulated rate base.

Our overall rate base grew to almost $2.4 billion for the year, an increase of 9.1% over 2023. If approved as requested, the 2024 California GRC and infrastructure improvement plan coupled with the planned capital investments by our utilities and other states would result in a compounded annual rate base growth of around 11.7%. This excludes the anticipated $226 million in PFAS capital investments plus any recovery offsets that are planned through 2027. Moving to Slide 11. We continue to maintain a strong balance sheet, executing on several initiatives during 2024. In August, the CPUC issued a final decision granting Cal Water the authority to issue up to $1.3 billion in new debt and equity securities. I’ll now turn the call back over to Marty for our recent dividend announcement.

Martin Kropelnicki: Great. Thanks, Jim. Looking on Page 13, we ended 2024 paying our 320th consecutive quarterly dividend. In January of this year, we announced an annual dividend increase of $0.08 a share plus a special onetime dividend increase of $0.04 a share, bringing the annual dividend to $1.24 a share, up from $1.12 a share. The dividend increase for 2025 represents 10.71% dividend increase and results in a 7.7% 5-year compound annual growth rate for our dividend growth. The special onetime dividend that was approved by our Board of Directors was meant to reward our shareholders as we dealt with the delayed 2021 General Rate Case and the financial challenges imposed to the company while we waited for rate relief. Your patience was appreciated, so thank you very, very much. With that, I’m going to turn it over to Greg to give us an update on what’s happening on the regulatory side in the rate case. Greg?

Greg Milleman: Thanks, Marty. Turning to Slide 14. I’m pleased to report that we continue to make progress with our 2024 General Rate Case. As a reminder, on our third quarter call in October, we had completed the initial prehearing conference and a judge and commissioner were assigned to our case. We are pleased with the assigned commissioner given his past work at the California Public Advocates to educate the CPUC on the negative customer impacts associated with rate case delays. Since then, the commission issued the scoping memo and ruling in November 2024. We completed public participation hearings across our service area and importantly, we saw strong support for our infrastructure improvement plans during these events.

We received the California Public Advocates report in late January. We are working with our teams internally to evaluate and respond in accordance with the California rate case plan schedule. Importantly, I would like to emphasize that this response was timely. To that point, given recent decisions issued by the CPUC and our current process, we are optimistic that we’ll be — we’ll be receiving a decision on a reasonably timely basis. and are pleased with the progression thus far. Before turning back to Marty, I just want to reiterate our proposal. We expect to invest $1.6 million in our districts from ’25 to ’27, including approximately $1.3 billion of newly proposed capital investments to continue providing reliable high-quality water service.

Our application includes an innovative low water use equity program designed to decouple revenue from water sales, while keeping rates affordable and reinforcing conservation goals. Our proposal includes rate increases to generate an additional… Our proposal includes rate increases to generate an additional $140.6 million for 2026, $74.2 million for 2027 and $83.6 million for 2028. We are now eight months into the standard 18-month review process with the CPUC. With that, I’ll turn it back to you, Marty.

Martin Kropelnicki: Great. Thanks. Prior to talking about a couple of things on the regulatory side, Jim, why don’t we take a moment to just talk about liquidity.

James Lynch: Yes. Thank you, Marty. So turning to Slide 12. We do continue to maintain a strong liquidity profile to execute both our capital plans and on our strategic investments. As of December 31, we had $50.1 million in unrestricted cash, $45.6 million in restricted cash and $395 million in available credit. Our credit facilities totaled $600 million with the ability to expand to $800 million and they mature in March of 2028. We’re proud to maintain our A+ stable rating for S&P Global and our capital first mortgage bonds continue to be rated AA-. And now I’ll turn the call back over to Marty to go over recent dividend program.

Martin Kropelnicki: Great. I covered the dividends already, but if we — everyone can jump to Slide 15, I want to talk about our cost of capital and a couple of other regulatory updates that are going on. First, as Jim mentioned, we got the approval to issue more debt and equity to finance our infrastructure improvement plans going into 2025 and beyond. I want to make sure we’re clear. This doesn’t mean we’re going to run out and raise $1 billion plus of debt and equity a day, but it does mean we have the ability to finance the capital program going forward, and the outbound years as we continue to make improvements to infrastructure. And I think that’s incredibly important as we continue to deal with wildfire hardening, sustainability and resiliency planning.

A couple of other things that I think are important to note, as we announced in January, the CPUC granted our request to postpone our cost of capital filing for another year until May 1, 2026. This effectively maintains Cal Water’s current capital structure through December 31, 2026, including the 10.27% current return on equity. Along with this decision, the CPUC also reauthorized the water cost of capital adjustment mechanism, which potentially adjust the rate of return when the Moody’s utility bond index fluctuates by more than 100 basis points. We appreciate the commission’s flexibility on pushing this out one more year. Obviously, with the rate case underway, we felt that our resources were better focused on the rate case versus doing a cost of capital filing at this time.

On the right-hand side of the page, we start talking a little bit more about other states. And for those of you who have been with us for a while, we have continued to grow our investments in Washington, Hawaii, New Mexico and now Texas. Internally, we’ve initiated a program to be more proactive in pursuing rate adjustments in our other states. All the states that I just mentioned are historic states, meaning we have to invest the dollars, put the plant in service, start depreciating that plant and then apply for rate relief. Our path forward on this or our strategy going forward is a dual or a two-pronged strategy. One, the company wants to be more proactive in enabling us to recover our cost in a more timely basis. i.e., doing more timely rate filings.

And two, by doing this, it provides for smaller incremental adjustments versus large less frequent adjustments, which affect rates for customers. So we’ve hired a senior rates executive into that position, who now oversees the rates for all of our home states, which are really our subsidiary companies, and we have kicked that off, and it’s off to the races. It’s a member of Greg’s team, and I think the team is off to a great start. While we’re talking about the subsidiary companies, so I want to take a moment to talk about our growth in Texas. I think as many of you know, we have been in that South Austin, North San Antonio market in that tech corridor. During 2025, we connected another 1200 customers to our systems, which gives us a total customer account in excess of 4,200.

That was up 39% year-over-year. In terms of committed connections, keep in mind, this is kind of greenfield. These housing developments are rapidly being developed. So we have what’s called a committed connection. This is where developers put money in escrow to provide the funding to connect to our system. So during 2024, we added almost another 2,200 connections to the committed list that means we have another just about 16,000 connections in escrow, waiting to connect to our systems in that market. That continues to be the fastest-growing area of our subsidiary companies is that South Austin market. So far, all of our work in that South Austin market has been on the wastewater side of the business. Turning to the next page, I want to take a moment to talk about our leadership in emergency preparedness and emergency response.

For those of you that read our proxy, you know that one of our main goals, one of our top five main goals is emergency preparedness and emergency response. More specifically, every year, we make it a goal, high bonuses to that goal to host a number of community EOCs or community emergency operations center exercises. These are very popular programs that we sponsor that allow multi-agency participation as well as utility first responders, utility employees first responders and community officials to hold drills to work — to learn to work together better in the event of a real disaster. These, obviously, with the wildfires that we had in Southern California, the ones we had in Hawaii. This is a very, very profitable program that yields very good results when you actually do have a disaster.

So we remain dedicated to our community outreach and our community EOC exercise that we’re doing. In addition, as we mentioned on Slide 16, we’ve invested nearly $1 million over the last five years in supporting our fire agencies and helping them buy equipment that they may not have budgets for. So equipment that help save lives and help save homes, et cetera. During 2024, we donated another $175,000 to a number of agencies in California through our Firefighter Grant Program. As we move into the spring, spring is right around the corner. We have a very proactive wildfire mitigation plan. That includes vegetation management, infrastructure upgrades and obviously, position our crews and backup equipment as we start moving into the fire months, which will most likely start as early as June for this year.

Of course, as it comes to Southern California, I’m very happy to report, none of our systems were directly affected by the wildfires in Southern California, although we did have a number of employees who had to evacuate their homes. All of our employees were safe, all of their homes were safe. And more importantly, none of our systems were affected by the fire. Having said that, it is — I was down there a couple of weeks ago. The fire scar is massive. There’s a lot of work that has to be done. Cal Water has contributed more than $100,000 to the various local agencies who were on the front line providing rate relief as well as we have doubled our employee match program, which allows our employees to make contributions to the local charities that support people on the front line, and we need to aid the most and we will match those contributions.

So going into ’25, you’ll see us continue our leadership role in emergency preparedness and emergency response. We think that’s one of the most important things we do, again, as we deal with kind of the climate change reality of the world that we live in. So looking ahead to 2025, let’s take a moment and talk about what to expect. First and foremost, as Greg and Jim both mentioned, it’s the third year of our rate case for California. California is our largest subsidiary company that we operate. So this is the year we tend to see the most amount of regulatory lag. So obviously, tightly managing our controllable expenses in the third year is really important. Additionally, we want to do everything that we can to keep the 2024 General Rate Case on schedule.

As I mentioned in my opening comments, the delayed 2021 Rate Case was very painful for the company. And I apologize that the financial results are very lumpy. So we went from maybe $51 million one year to having this record off the charts revenue this year. But as Jim said, that is the recognition of the retroactive piece of the rates in California. So obviously, we want to do everything we can to avoid that situation with the 2024 rate case and hopefully bring that into conclusion by the end of this year. We also want to continue to evaluate strategic growth areas through targeted domestic M&A opportunities and continuing our greenfield development in Texas, which is yielding very, very good results. And lastly and probably most importantly, we want to continue to provide our best-in-class service for our customers as well as water quality.

So there will be a lot happening during 2025. Obviously, the infrastructure improvement plans are big. I’m very happy with the results. And I think, again, you have to see through the clutter of the lumpiness of the results. But really, when you strip it away, you had record revenue, you had record earnings on a normalized basis, pro forma basis as well as record capital, record dividend growth. We had no primary secondary water quality violations. We had outstanding customer service scores. So the company is positioned very, very well going into 2025, and I look forward to sharing with you the Q1 results here in a couple of months. So Dustin, with that, why don’t we open it up for questions, please?

Operator: [Operator Instructions] And with the first question, this is coming from the line of Jonathan Reeder from Wells Fargo. Your line is open.

Jonathan Reeder: Hi, good morning, team. How are you’ll?

Martin Kropelnicki: Good morning, Jonathan.

Greg Milleman: Hi Jonathan.

Jonathan Reeder: Thanks for taking my question and congrats on a good update. First off, I just wanted to get your thoughts on the public advocates position in the 2026 to 2028 GRC and what you believe the potential is to reach a settlement, particularly on the key items like CapEx and expenses, obviously, decoupling might be a little more controversial.

Martin Kropelnicki: Greg, do you want to take that one first?

Greg Milleman: Yes, certainly, Jonathan. This is kind of — you’ve been around, so you’ve seen it. It’s traditionally always a pretty far margin where public advocates will come in. But in light of some of the activity that’s been happening recently with the other water companies, I believe that we will have an opportunity to sort through some of this stuff and settle on various items. Right now, we’re still, as I said, working through our positions and putting together our rebuttal to put ourselves in a better negotiation position for those settlement discussions by providing additional evidence for the record. So optimistic that things could go well.

Martin Kropelnicki: Yes. And I’d just add to that, Jonathan, one of the pivots that companies made over the last 10 years is really taking a risk-based approach to our capital program. So obviously, the biggest part of our request to the commission is really the capital dollars that we need to continue to make the infrastructure improvement changes that we need as we adapt to the climate change and try to improve sustainability. So because that program is very risk focused, it’s very risk detailed, and we look for the highest rates of return that eliminate the highest amount of risks. So I think that actually helps us in these discussions. But I think Greg is right. It will be a process. It will always be a very good debate, I’m picking my words carefully as we go into negotiations around these key things, but we’re very keenly focused on risk mitigation and adapting for our future.

And I think that is really, really important. As we just saw in Southern California, another big wildfire. We got to continue wildfire hardening and readying our systems for these changes that we’re dealing, with that are dealing with climate change. So I agree with Greg. So far, I think we’re on track. We got the advocates report. We’re going through it. We’re working on our responses now. I’ve been very happy with the assigned commissioner because every indication we’ve seen for them so far is he wants to try to keep the GRC on course. But the next big lift after we file our rebuttal is really getting into those settlement discussions that will take place early in the summer months and we’ll see where we end up.

Jonathan Reeder: Okay. So early in the summer months is when settlement kind of commences?

Greg Milleman: Actually, on the schedule right now, Jonathan, it’s for April, where we work in for settlement and then hearings are scheduled for May.

Jonathan Reeder: Okay. And I mean there’s nothing that prevents you from reaching a settlement after the hearings if one isn’t able to be reached before hand, correct?

Greg Milleman: Correct. Correct. Yes.

Jonathan Reeder: Okay. Marty or this is for Jim, is the roughly $85 million of equity issued in ’24 under the ATM, a good annual run rate to assume in the years ahead? Or how should we be thinking about annual equity needs to support the proposed — and I know it’s just proposed 2025 to 2027 CapEx and rate base budget.

James Lynch: Yes. I think it’s a great question, Jonathan. So the current ATM expires in April. So we’ll be looking to renew the current program after we’re actually in the process of taking a look at it now. And as part of that, we’re doing an assessment in terms of what we think we would need in terms of the amount of the shelf in order to support the capital investments as we move forward. Clearly, as we work through the rate process, we’ll assess exactly where we want to land relative to the shelf to see what we need to support that program. So I think more to come on that. I will tell you that we are targeting to kind of raise equity only to the extent that it is necessary for us to maintain consistent capital structure at the group level relative to what we are authorized and specifically in California, but in our operating utilities.

I think that’s really our focus in terms of how we plan to use it going forward. So really, I don’t — I’m trying not to give you a number because it’s going to be really opportunistic in terms of where we need it relative to support the CapEx plan or any other capital initiatives as well as how we are specifically tracking relative to our cap structures.

Martin Kropelnicki: And Jim, I think it’s probably fair to add to that, too. I mean, I mean the balance sheet is in great shape. We have plenty of liquidity. Our lines of credit are very, very strong. Our credit ratings outstanding. It’s also a function of what the capital needs are, what’s happening in the short-term interest rate markets, right, and kind of what the long-term capital needs are. So hopefully, we continue to get some amount of stability in the interest rate market as well as the capital markets as they get more choppy, as we’ve seen kind of in the previous kind of 18 months, the interest rates going up, certainly help raise the weighted average cost of capital for everything. And so part of Jim’s job is to be a little opportunistic to look at these places where we can jump in and raise equity, our debt when it is needed and get it at the lowest possible price for our customers.

James Lynch: Yes. Certainly, we are going to keep an eye on the markets and take advantage of when the best time is to be in both the debt and the equity markets to support our programs.

Jonathan Reeder: Okay. And remind me, I mean, I think right now, at the group level, you’re overequitized relative to what’s authorized in California. Is that correct where maybe on a go-forward basis, maybe you don’t need as much of that $85 million annually. Is that fair?

James Lynch: Yes, I think that’s fair. Again, I hesitate to put a number on it, but it is our objective to bring that as you described it, over-equitization down to be more consistent with our opcos and doing that as Marty said, in the most efficient manner.

Jonathan Reeder: Excellent. Okay. And then, I think, Marty, you were the one that discussed the growth in Texas thus far, noted that so far, all work has been on the wastewater side. Do you have aspirations or near-term plans to move into water there?

Martin Kropelnicki: Yes, we do. If you recall, Jonathan, we put a press release out, I want to say it was 18 months ago. So technically two years ago, where we partner with the Guadalupe Basin River Authority to extend their water pipeline into that South Austin market where there’s no water. So as that pipeline gets built we anticipate that we will get into the water business in the South Austin market when that pipeline is completed, and that’s a public-private partnership — that it’s a number of municipal players plus ourselves and the Guadalupe Basin River Authority. And I’d have to go back and look at the project schedule, I believe it gets into 2026 now is when that water is supposed to be starting to be delivered in that South Austin market.

So as soon as that happens, obviously, there is so much development going on in that system in that area. If people haven’t been out there, Jim and I, as well as the number of people at Cal Water, we grew up in Silicon Valley during the Silicon Valley boom, which is pretty remarkable for all of us working here. It was a great time to be in the valley and just things were taken off. It was a great job market for everyone. But the explosion of growth in that South Austin corridor, I would say, is probably tenfold what the explosion was in Silicon Valley back in the ’80s. And for anyone who has lived in Silicon Valley during the ’80s think about that. I mean, it’s just — there’s so much growth going on. I was out there at the end of January and plant that we just put in has already has hundreds of customers connected to it, and we’re looking at the plant expansion to the next level of the plant because things are just growing so fast.

So yes, we will get into water in that South Austin Market. We’re making investments in pipelines right now to bring that water into that market. And then in the meantime, we’re going to continue to grow the wastewater business in that area.

Jonathan Reeder: Okay. And on the water side, I mean, would it be similar where it’s kind of these agreements with developers, kind of as you could call it, greenfield developments. Does that help think about it on the water side?

Martin Kropelnicki: That’s exactly what it is. And this is really kind of greenfield development. We partnered with another company that specializes in it. They’re very, very good at it. BVRT is the company name and it’s basically greenfield development. And again, I’d encourage if anyone is interested in this, give me a call, be happy to take you out there, but you drive that corridor and the amount of growth going on, both residential, but also commercial. It’s just mind-boggling.

Jonathan Reeder: Okay. Great. And I appreciate that color. And then last one for me, just a house keeping item. The release mentioned like $87.5 million of revenue, $64 million of net income from the retroactive benefit of the delayed GRC decision. Does that fully capture the IBA offset to? Because I was thinking you previously said the retractive benefit was roughly $1 whereas that $64 million implies like $0.09 or $0.10 higher.

James Lynch: I’m sorry, Jonathan, I missed the first part of your question. If you could just kind of go back through that.

Jonathan Reeder: Yes. I mean the release mentioned a $64 million net income, retroactive benefit from the delayed GRC decision that was recorded in Q1. But does that fully capture. I thought there was also like an ICBA offset. That’s kind of how you got to roughly $1 whereas that $0.64 — sorry, the $64 million net income number applies something higher, more like $1.10?

James Lynch: Yes, it does — it captures the major components of it. There were some other things that have — we didn’t really discuss on the call, but impacted the overall contribution of the 2021 rate case into the 2024 results, and I can walk you through the smaller numbers to get you to that $1.10 number.

Jonathan Reeder: Okay. So I mean — so $1.10 is more accurate. So we should be thinking about the $2.25 – or sorry, the $3.25 less the $1.10?

James Lynch: I think so, yes. I focus on the $1.10 number.

Jonathan Reeder: Excellent. All right, thanks so much, guys. I appreciate your patience in answering all my questions.

James Lynch: Thanks Jonathan.

Operator: [Operator Instructions] And our next question comes from the line of Davis Sunderland from Baird. Your line is open.

Davis Sunderland: Good morning, guys. Congrats on a great update. And thank you for taking my questions.

James Lynch: Absolutely. How are you?

Davis Sunderland: I’m doing well, thank you. And I guess I’ll just start, Jonathan took a lot of my questions, and thank you for all the color on those. Maybe if I could just add on to one that he was asking about Texas and your comments, Marty, about Texas. Maybe more broadly with the liquidity profile that you guys have, how are you thinking about acquisitions potentially in ’25 and I guess the business development pipeline more broadly? And then I have one housekeeping after that.

James Lynch: Yes. No, Davis, it’s a great question. And I just want to reference back to that rate base growth slide that Jim mentioned. Obviously, we’re in a really, really good spot right now. We have almost a 12% growth rate on rate base. That does not include the capital investments we’ll be making over the next three to four years on PFAS and PFOA. So from a growth perspective, a rate base growth perspective, we need to stay really focused internally on executing our plan because we’re running at, I think, the fastest clip that Cal Water has been at since I’ve been here. And I think the fastest clip that it’s been at since probably the 1980s. Obviously, you had some boom during the Silicon Valley days of the late ’70s. But right now, we’re just in a great spot.

So for us to lose focus on the core business, it has to be a really good opportunity now. Now having said that, obviously, we are going to continue to look and we’ll be very, very strategic. We are interested in expanding our service territory, and we do have plenty of capacity on the balance sheet. But the primary growth engine of Cal Water has been and will continue to be that investment through our infrastructure improvement plans on our existing infrastructure, and then we’ll supplement that with strategic M&A and targeted markets. So if opportunities are there, and it looks like we can make money on them, and we can add value to, from a customer perspective and a regulatory perspective, we’ll be all over it. If there’s opportunities where we cannot make money or it’s a poor regulatory market or there’s not a lot of room to build out, we’re probably going to be less interested in it.

So Shilen Patel does a great job running our business development activities. He partners with Shawn Bunting, our General Counsel, who also has a lot of experience in utility M&A. So we have a great team working on this area, but we will continue to be strategic in our focus and keeping an eye on the real family jewel here of the company, jewel, is that rate base growth and making sure we can hit our targets around that and supplementing our growth with strategic M&A.

Martin Kropelnicki: And I think I’d just add one thing, Davis, in that regard. BVRT was a new — or Texas is a new platform for us. And it’s a new platform and a very strong market. And the greenfield developments that we are involved in down there are showing tremendous growth, as Marty mentioned. It’s everything that we would want in an M&A activity or opportunity that we’re getting by being in that market. So I know we’ve described it as a greenfield development that we’ve been involved in from day one, but you can really take a look at it as if it’s us going into a new market with a great new platform and an opportunity for significant growth. And that’s right — it checks a lot of boxes, if you will, in terms of what we look for in terms of M&A activity.

James Lynch: Yes, Davis, I mentioned I was in Texas at the end of January. And we had an employee get together. And a number of their employees were like, oh, Marty, God, we feel a little bad that we only had almost a 17% growth rate year-over-year. And because the growth was in the previous years will be even bigger than that. And like dang, if we can maintain a 16% growth rate, I will be the happiest CEO in the water space, very happy with that, let’s maintain our cadence. We got all those developers’ fees and escrow. We have to get that 15,000 to 16,000 customers connected to our system. They paid their fees. So we have to have those systems ready to go and let’s just keep building out the system and stay focused. So it’s kind of funny. They were like, God, we were a little — we wish we had a little bit more growth that we could report during the year. I’m very happy with that 16%, almost 17%.

Davis Sunderland: Absolutely. Thank you, Marty. And thank you, Jim. I got you loud and clear. Maybe then just one other quick one. You mentioned in the first part of your first response, Marty, just about PFOA and PFAS not being included in the CapEx plans? And I guess, why is that? Is it as simple as when you went through the general rate case, those costs were estimated yet? Or is there a reason to think about those differently? And I guess how should we think about the cadence of those — or of spending on those upgrades? Thanks guys.

Martin Kropelnicki: Yes, I’ll start, and then I’ll have Greg kind of jump in as well. So one, it’s a new water quality standard, right, that was set out by the EPA. So that’s number one, it was new. Number two, we had to go out and survey all of our water sources. And that sounds like an easy concept on the front line, but we have over almost 1,200 wells that we have to go out and do the testing for PFOA and PFAS. We have to identify the wells, et cetera. So there was a certain amount of uncertainty with how big is the program going to be and then ultimately, you had some uncertainty coming from the EPA, when were they going to adopt the guidelines, how the state’s going to adopt the guidelines. So for example, in California, California gave us a memo account which, if you look at that criteria, it’s known, but it’s uncertain and timing is not knowing.

So the capital cost and the timing is not quite known yet, it qualified for memo account treatment. So we’re lucky we have a memo account in California. In the three states, we got to deal with PFOA and PFAS, it’s really California, it’s Washington, and it’s New Mexico. Those are the areas that we’re doing the most work in. And so it will evolve. Obviously, we’re going to run it as a corporate program, right, because it is a new water quality initiative and standard. And our goal is to meet and exceed those water quality standards every day that we operate in. So that’s why it’s kind of outside the rate case is because of the uncertainty of timing and we still have to estimate the capital. But the estimates are still moving around a little bit, but we’re starting to hone in on what those numbers are going to look like.

Greg, anything you want to add on that?

Greg Milleman: Actually, I was going to, but you wrapped it and you wrapped up, you hit it all. It’s really getting — nailing down the estimates. That was the direction we got from the commission.

Davis Sunderland: Super helpful, guys. Thank you so much.

Greg Milleman: All right, Davis. Have a good day.

Operator: Thank you. As there are no more questions in the queue, that concludes our question-and-answer session. I will now turn the call back over to our CEO, Marty Kropelnicki for closing remarks.

Martin Kropelnicki: All right, Dustin, thank you. Well, everyone, thanks for taking time today. I know it’s earnings week, and a lot of people are releasing. Jim and I will be around the rest of this week and next week, if anyone has questions, please feel free to reach out to us, and we’ll answer them any way that we can. It’s nice to have 2024 closed. And in the rearview mirror, a lot going on in 2025 that we’re excited about, and we look forward to reporting our results at the end of the first quarter at the end of April. So thank you very much for joining us today. Have a great day and be safe. Thank you.

Operator: The meeting has now concluded. Thank you all for joining. You may now disconnect.