Q1 2024 California Water Service Group Earnings Call

[music].

Good day, ladies and gentlemen, thank you for standing by and welcome to the California Water Service group first quarter 'twenty 'twenty four earnings call.

Operator: Good day, ladies and gentlemen. Thank you for standing by, and welcome to the California Water Service Group first quarter 2024 earnings call. During today's presentation, all parties will be in a listen mode only. Following the presentation, the conference will be open for question and answer. This call is being recorded.

Operator: During todays presentation, all parties will be in a listen mode. Only following the presentation. The conference will be open quick question and answer.

Operator: This call is being recorded I would like to turn the call over to Jim Lynch Senior Vice President CFO and Treasurer. Please go ahead.

James P. Lynch: Thank you, Ellie. Welcome, everyone, to our first quarter 2024 results call for California Water Service. With me today is Marty Kropelnicki, our Chairman and CEO, and Greg Milleman, Vice President of Rates and Regulatory Affairs. Replay dial-in information for this call can be found in our quarterly results release, which was issued earlier today. A replay of the call will be available until Monday, June 24, 2024.

Operator: Thank you Ali welcome everyone to our first quarter 2024 results call for California Water Service group with me today is Marty crumpled, Nicky, our chairman and CEO and Greg Melanie <unk>, Vice president of rates and regulatory affairs.

James P. Lynch: Replay dial in information for this call can be found in our quarterly results release, which was issued earlier today.

James P. Lynch: Replay of the call will be available until Monday June 24, 2024.

James P. Lynch: As a reminder, before we begin the company has a slide deck to accompany the earnings call today.

James P. Lynch: As a reminder, before we begin, the company has a slide deck to accompany the earnings call today. The slide deck was furnished with an 8k and is also available on the company's website at www.calwatergroup.com Before looking at the first quarter 2024 results, I'd like to take a few moments to cover forward-looking statements. During the course of the call, the company may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties, and actual results could differ materially from the company's current expectations. Because of this, the company strongly advises all current shareholders, as well as interested parties, to carefully read and understand the company's disclosures on risks and uncertainties found in our Forms 10-K, and 10-Q press release.

James P. Lynch: Slide deck was furnished with an 8-K and is also available at the company's website at Www Cal water group Dot com.

James P. Lynch: Before looking at the first quarter of 2024 results I'd like to take a few moments to cover forward looking statements.

James P. Lynch: During the course of the call the company May make certain forward looking statements.

James P. Lynch: 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.

James P. Lynch: Because of this the company strongly advises all current shareholders as well as interested parties to carefully read and understand the company's disclosures on risks and uncertainties found in our forms 10-K, 10-Q press releases and other reports filed from time to time with the securities.

Martin A. Kropelnicki: Thank you, Jim. Good morning, everyone.

Martin A. Kropelnicki: Thanks for joining us today to talk about our Q1 2024 results. We have a number of topics to cover today, starting with their strong operational performance, which is really highlighted by the final resolution of the 2021 general rate case. And I will say that after going through the delays, which stretched out over 2023. It's nice to see the arrows all going in the right direction.

Martin A. Kropelnicki: And Exchange Commission.

Martin A. Kropelnicki: And now I will turn the call over to Marty.

Speaker Change: Thank you Jim and good morning, everyone. Thanks for joining us today to talk about our Q1 2024 results.

Martin A. Kropelnicki: We have a number of topics to cover today, starting with our strong operational performance, which is highlighted by the final resolution of the 2021 general rate case, and I will say, it's after going through the delays, which stretched out over 2023, it's nice to see the arrows all going in the right direction and big Kudos to Jim.

Martin A. Kropelnicki: And big kudos to Jim and the team for booking everything and getting it all set up here as we wrap up Q1. In addition, we'll want to talk about the implementation of the Water Cost to Capital Adjustment Mechanism, which sets our return on equity for 2024 at 10.27%. We were able to secure an additional $83 million of COVID funds from the state of California to help our customers with past due balances that linger from our COVID times.

Martin A. Kropelnicki: And.

Martin A. Kropelnicki: Jim and the team for booking everything and getting it all set up here as we wrap up Q1. In addition, we will want to talk about the implementation of.

Martin A. Kropelnicki: The water cost of capital adjustment mechanism, which sets our return on equity for 2000 and for 2024 at 10, 7%.

Martin A. Kropelnicki: We were able to secure an additional $83 million of Covid funds from the state of California to help our customers on past due balances that linger from our Covid times.

Martin A. Kropelnicki: And then talk about where we are with PFAS and the EPA's new regulation and our plans to be in compliance with that. And then, finally, wrap up by talking about the commitment we made recently to reduce our scope one and scope two emissions. But prior to going into some of these more operational themes, I'm going to turn it back over to Jim to review the financial results for the first quarter of 2024. Thank you, Marty.

Martin A. Kropelnicki: And then talk about our where we are with <unk> and the Epa's new regulation and.

Martin A. Kropelnicki: In compliance with that and then finally wrap up talking about that we made recently to reduce our scope one and scope two emissions, but prior to going into some of these more operational themes I'm going to turn it back over to Jim duration review the financial results for the first quarter of 2020 for Jim. Thank you Marty as Marty mentioned, our first quarter results.

James P. Lynch: As Marty mentioned, our first quarter results benefited from the conclusion of our 2021 general rate case. Operating revenue for the quarter increased 106.5% to $270.7 million compared to the prior year first quarter revenue of $131.1 million. The implementation of two regulatory mechanisms authorized by the 2021 GRC decision had a significant impact on revenues, with the Interim Rates Memorandum Account, or IRMA, adding $80.7 million, and the Monterey Stilewater Revenue Mechanism, or MRAM, adding $31.7 million. Recorded IRMA and MRAM revenue included $70.2 million and $17.6 million, respectively, related to fiscal year 2023. Greg will walk us through the 2021 GRC decision later in the presentation.

James P. Lynch: <unk> benefited from the conclusion of our 2021 general rate case.

James P. Lynch: Operating revenue for the quarter increased 106, 5% to $277 million compared to the prior year first quarter revenue of $131 1 million <unk>.

James P. Lynch: The implementation of two regulatory mechanisms authorized by the 2021 GIC decision had a significant impact on revenues with the interim rates memorandum account or <unk>, adding $80 $7 million in the Monterey style water revenue mechanism or M Ram adding $31 seven.

James P. Lynch: Milligan.

James P. Lynch: Recorded Irma and M. Ram revenue included $70 2 million and $17 6 million, respectively related to fiscal year 2023, Greg.

James P. Lynch: Greg will walk us through the 2021 GIC decision later in the presentation.

James P. Lynch: The revenue increase also included $13.9 million related to the recognition of Water Revenue Adjustment Mechanism or RAM revenue that was deferred in previous reporting periods. First quarter 2024 operating expenses increased $192.9 million compared to the first quarter total operating expenses of $148.6 million. The $44.3 million increase was primarily driven by $9.2 million in higher water production costs associated with the company's new incremental cost balancing account, or ICBA; higher other operating expenses, primarily due to $11.4 million in deferred costs associated with the recognized deferred RAM revenue; and a $21.2 million increase in income taxes related to higher pre-tax earnings.

James P. Lynch: The revenue increase also included $13 $9 million related to the recognition of water revenue adjustment mechanism or Ram revenue that was deferred in previous reporting periods.

James P. Lynch: First quarter 2024, operating expenses increased $192 9 million.

James P. Lynch: Compared to the first quarter total operating expenses of $148 6 million.

James P. Lynch: The $44 3 million increase was primarily driven by $9 $2 million and higher water production cost associated with the company's new incremental cost balancing account or CPA.

James P. Lynch: Other operations expenses, primarily due to $11 $4 million in deferred costs associated with the recognized deferred Ram revenue and a $21 $2 million increase in income taxes related to higher pre tax earnings.

James P. Lynch: Net interest expense increased 25.5% to $15 million during the first quarter, as compared to $12 million for the first quarter of 2023. The increase was primarily due to higher short-term borrowing rates and higher balances on our outstanding lines of credit. Reported net income for the first quarter was $69.9 million, up nearly 415% compared to a loss of $22.2 million in the first quarter of 2023. Turning to the earnings per share first quarter 2024 earnings, diluted earnings per share was $1.21 compared to a loss of $0.40 per share in the first quarter of 2023.

James P. Lynch: Net interest expense increased 25, 5% to $15 million during the first quarter as compared to $12 million for the first quarter of 2023.

James P. Lynch: The increase was primarily due to higher short term borrowing rates and higher balances on our outstanding lines of credit.

James P. Lynch: Reported net income for the first quarter was $69 $9 million up nearly 415% compared to a loss of $22 $2 million in the first quarter of 2023.

James P. Lynch: Turning to the earnings per share first quarter 2020 for earnings.

James P. Lynch: Diluted earnings per share was $1 21, compared to first quarter of 2023 loss of <unk> 40 per share.

James P. Lynch: The significant increase in EPS was driven by resolution of our 2021 general rate case, coupled with rate increases and the reversal of previously deferred RAM revenue. These increases were partially offset by increased expenses, including higher water production expenses related to the new ICBA regulatory mechanism, higher production expenses due to the reversal of RAM-related deferred production costs, and interest expense.

James P. Lynch: The significant increase in EPS was driven by resolution of our 2021 general rate case, coupled with rate increases and the reversal of previously deferred Ram revenue.

James P. Lynch: These increases were partially offset by increased expenses, including higher water production expenses related to the new ICA regulatory mechanism.

James P. Lynch: Higher production expenses due to the reversal of Ram related deferred production cost and interest expense.

James P. Lynch: Turning to capital, we continue to make significant investments in our water utilities to help ensure the delivery of safe and reliable water service. We invested just under $110 million in capital improvements during the first quarter of 2024. This was an increase of approximately 34% over the first quarter of 2023. For the year, we anticipate making approximately $380 million in capital investments, which includes an estimated $20 million in developer-funded projects. The appreciation for the first quarter of 2024 was $32.8 million, or approximately 30% of first quarter capital investment expenditures.

James P. Lynch: Turning to capital we continue to make significant investments in our water utilities to help ensure the delivery of safe and reliable water service.

James P. Lynch: We invested just under $110 million in capital improvements during the first quarter of 2024. This was an increase of approximately 34% over the first quarter of 2023.

James P. Lynch: For the year, we anticipate making approximately $380 million in capital investments, which includes an estimated $20 million in developer funded projects.

James P. Lynch: Depreciation for the first quarter of 2024 was $32 8 million or approximately 30% of <unk>.

James P. Lynch: First quarter capital investment expenditures.

James P. Lynch: The success of our capital investment strategy is reflected in our rate base growth. Our overall rate base grew to an estimated $2 $2 billion by the end of 2023. This was an increase of 15, 4% over 2022.

James P. Lynch: The success of our capital investment strategy is reflected in our rate base growth. Our overall rate base is projected to grow to an estimated $2.2 billion by the end of 2023. This was an increase of 15.4% over 2022. Further, based on our current planned capital expenditures and subject to regulatory approval, we estimate that our rate base will grow to $2.36 billion by the end of 2024 and $2.47 billion by the end of 2025. Turning to dividends, at the beginning of the year, we increased the annual dividend by 7.7% from $1.04 to $1.12 per share.

James P. Lynch: Further based on our current planned capital expenditures and subject to regulatory approval, we estimate that rate base will grow to $2 $36 billion by the end of 2024 and $2 $47 billion by the end of 2025.

James P. Lynch: Turning to dividends at the beginning of the year, we increased the annual dividend seven 7% from $1 four to $1 12 per share, which marks our 57th consecutive annual dividend increase and yesterday, we declared a quarterly dividend of <unk> 28 per share for shareholders on <unk>.

James P. Lynch: This marks our 57th consecutive annual dividend increase, and yesterday we declared a quarterly dividend of 28 cents per share for shareholders on record as of May 6, 2024. This was our 317th consecutive quarterly. We continue to maintain a strong liquidity position. As of March 31, 2024, the company maintained cash and cash equivalents of $88.3 million, of which $45.4 million was classified as restricted. Additionally, we had additional short-term borrowing capacity on our lines of credit of $320 million.

James P. Lynch: Third as of May six 2020 for.

James P. Lynch: This was our 317th consecutive quarterly dividend.

James P. Lynch: We continue to maintain a strong liquidity position as of March 31, 2024, the company maintained cash and cash equivalents of $88 3 million of which $45 4 million was classified as restricted.

James P. Lynch: Further we had additional short term borrowing capacity on our lines of credit of $320 million.

James P. Lynch: Lastly, we are pleased to report that subsequent to the end of the quarter, we received approximately $83 million under the state of California extended our <unk> program. The program is designed to provide financial assistance to customers with past due balances that accrued during the COVID-19 pandemic.

James P. Lynch: Lastly, we are pleased to report that, subsequent to the end of the quarter, we received approximately $83 million under the State of California Extended Arrearage Program. The program is designed to provide financial assistance to customers with past due balances that accrued during the COVID-19 pandemic.

James P. Lynch: Marty will provide additional color on the program in a few minutes. With that, I'll turn the call over to Greg to give an update on our 2021 general rate case. Right, sure, thanks Jim. I'm going to walk through some of the highlights of the decision we received on our 2021 GRC decision that we received on March 7th, 2024.

James P. Lynch: Marty will provide additional color on the program in a few minutes.

James P. Lynch: With that I'll turn the call over to Greg to give an update on our 2021 general rate case decision alright sure. Thanks, Jim.

James P. Lynch: Walk through some of the highlights of the decision we for our 2021 <unk> decision that we received March seven 2024.

Greg A. Milleman: Overall, the decision was financially very positive for the company. Jim indicated the decision increased adopted revenues after corrections for 2023 by approximately 41.5 million retroactive back to January 1st, 2023. The decision also adopted 95% of the requested operating expenses. It adopted a very favorable water mix for groundwater and purchased water that provides the company financial protection. It authorizes Cal Water to invest $1.2 billion, which is 86% of our request from 2021 through 2024 for our water system infrastructure projects, including approximately $160 million of infrastructure projects that may be submitted for recovery via the PUC's Advice Center process.

Greg: The decision was financially very positive for the company.

Greg A. Milleman: <unk> indicated that decision increases adopted revenues after corrections for 2023 by approximately $41 5 million retroactive back to January one 2023.

Greg A. Milleman: The decision also adopted 95% of their requested operating expenses and adopted a very favorable water mix for <unk>.

Greg A. Milleman: Groundwater purchase water that provides the company financial protection.

Greg A. Milleman: It authorizes Cal water to invest $1 2 billion.

Greg A. Milleman: Which the 80, 686% of our request.

Greg A. Milleman: From 2021 through 2024, and our water system infrastructure projects, including approximately $160 million of infrastructure projects that may be submitted for recovery of the Ed D.

Greg A. Milleman: <unk> advice letter process.

Greg A. Milleman: In fact, we've already filed an advice letter for 145 projects capitalized at $39 million for a $5.8 million increase in annual revenue. The decision provides a very progressive rate design that provides financial stability while benefiting low-income, low-water customers. And finally, and most importantly, when voting out the decision on March 7th, the commissioners all agreed that the process took too long. And so I'm hopeful that the decision on our 24th case will come out more timely. Back to you, Marty.

Greg A. Milleman: In fact, we've already filed an advice letter for 145 projects capitalize that $39 million.

Greg A. Milleman: $5 8 million increase in annual revenues.

Greg A. Milleman: Decision provides a very progressive rate design that provides financial stability, while benefiting low income low water using customers and finally and most importantly, when voting decision on March seven the commenced the commissioners all agree that the process took too long and so I am hopeful that the decision on our 2000.

Greg A. Milleman: For case will come out more tightened.

Greg A. Milleman: Back to you Marty.

Martin A. Kropelnicki: See you, Mark. Great. Thanks, Greg. Just echoing what you said when we were in the hearing room with the commissioners, every commissioner did comment on that. We think that's a good sign that they recognize the problems this is causing, not only for us, but also for our customers, and it's going to have a pancaking effect on them.

Marty: Thanks, Greg just echo what you said when we were in the hearing room with the Commissioners every commissioner it did comment on that and we think that's a good sign that they recognize the problems. This was causing not only for us, but also for our customers and it's going to have a pancake and effect on the rates.

Martin A. Kropelnicki: Thank you. Thank you. I'm going to be on slide 10.

Martin A. Kropelnicki: I'm going to be on slide 10, I want to come back to the.

Martin A. Kropelnicki: I want to come back to the extended rearage management program for the state of California. I think, as many of you know, we have been extremely proactive with our government affairs team in Sacramento and looking for ways to help our customers who are still suffering the kind of hangover from the pandemic. If you recall, the state of California had an original rearage management program that kind of covered half of the COVID time, and then it cut off, and for that first part, the company was able to secure a little over $20 million that was applied to our customer balances during the COVID time.

Martin A. Kropelnicki: Extended rearrange management program for the state of California.

Martin A. Kropelnicki: I think as many of you know we have been extremely proactive our government affairs team in Sacramento and.

Martin A. Kropelnicki: And looking for ways to help our customers who are still suffering in kind of the hangover of the pandemic as you recall the state of California had an original rearrange management programs that kind of covered path of the Covid time, and then it cut off and for that first part of the company was able to secure a little over $20 million that was applied to our.

Martin A. Kropelnicki: <unk> balances during the Covid time.

Martin A. Kropelnicki: We were able to work with the state to take some of the unspent federal dollars that were allocated to the state and come up with a Rearage Management Program, kind of like number two. So, we worked with the state to appropriate approximately $300 to $400 million of unspent federal dollars and reopen that window to allow utilities and water companies to apply for further funds to offset the past due balances from June 16th, 2021 through December 31st, 2022.

Martin A. Kropelnicki: We are able to work with the state to take some of the unspent federal dollars that were allocated to the states.

Martin A. Kropelnicki: And come up with that range management program kind of number too. So we worked with the state to appropriate.

Martin A. Kropelnicki: Approximately $300 million to $400 million of unspent federal dollars and reopen up that window to allow utilities and water companies to apply for further funds to offset the past due balances from June 16th 2021 through December 31 2022.

Martin A. Kropelnicki: I'm very happy to report that our application was accepted and we received the entirety of a request, which is $83 million from Jim. That money has been received, and during the second quarter, we'll be allocating those dollars to those past due balances again from between June 16, 2021 through December 31, 2022. These funds benefit both current and past customers because all customers eventually bear the cost of an uncollectible account. Moving on to slide 11.

Martin A. Kropelnicki: Very happy to report that our application was accepted and we received the entirety of our request, which is $83 million that Jim mentioned.

Martin A. Kropelnicki: That money has been received and during the second quarter, we will be allocating those dollars to those past due balances again from between June 16th 2021 through December 31 2022.

Martin A. Kropelnicki: These funds benefit both current and past customers because all customers eventually bear the cost of uncollectible accounts moved.

Martin A. Kropelnicki: Moving on to slide 11.

Martin A. Kropelnicki: I want to take a moment to update everyone on where we are with the PFAS regulations that have come out, also known as Forever Chemicals. We believe we continue to be well positioned to meet the EPA's new guidelines. Across our portfolio, we have a rigorous and coordinated water quality assurance program with protocols in place to test and monitor the water we deliver to our customers. I think, as many of you know, that Invest and Investor on Water Utilities take public health as one of the most important things we do as a company.

Martin A. Kropelnicki: Want to take a moment to.

Martin A. Kropelnicki: Update everyone on where we are.

Martin A. Kropelnicki: What the <unk> regulations that have come out also nice forever chemicals chemicals.

Martin A. Kropelnicki: We believe we continue to be well positioned to meet the epa's new guidelines across our portfolio, we have a rigorous and coordinated water quality assurance program with protocols in place to test and monitor the water we deliver to our customers I think as many of you know that invest in investor owned water utilities, we take public health is one of the most important.

Martin A. Kropelnicki: Things, we do as a company.

Martin A. Kropelnicki: We've had a fair amount of experience with PFOA and PFOS in California and Washington. Our utilities have been complying with the previously issued PFOS guidelines issued by their state regulators. On April 18, the California Public Utilities Commission dismissed our application requesting authorization to modify a previously approved PFAS expense balancing account to include capital investments related to the PFAS compliance. DPUC indicated that we would need to file for recovery of the capital components of PBOS treatment later in the process.

Martin A. Kropelnicki: We've had a fair amount of experience with <unk> in California, and Washington are utilities have been complying with the previously issued <unk> guidelines issued by the state regulators on.

Martin A. Kropelnicki: On April 18th the California Public Utilities Commission dismissed our application requesting authorization to modify a previously approved P. Boss expense balancing account to include capital investments related to the P fast compliance CPU.

Martin A. Kropelnicki: CPUC indicated that we would need to file for recovery of the capital components of <unk> treatment later in the process. What that really means is first of all I was disappointed that day by.

Martin A. Kropelnicki: What that really means is, first of all, I was disappointed they denied it. They dismissed it without prejudice, but it allows us to file a separate application or include it in the 2024 general rate. And I believe, Greg, our plans are to file it as a separate application. That is correct. Despite the commission's short-sightedness recognizing the urgency that you need to get this PFOS treatment in the ground, the company put out a press release reaffirming its commitment to its customers that we'll be investing the $215 million expeditiously to put PFOS treatment in place for approximately 100 wells in all the states that we operate in.

Martin A. Kropelnicki: They denied it.

Martin A. Kropelnicki: They dismissed without prejudice, but it allows us to file a separate appetite application are included in the 2024 general rate case, and I believe Greg our plans are to file it as a separate application that is correct outside the rate case despite.

Martin A. Kropelnicki: Despite the commission short sightedness, recognizing the urgency that you need to get this people on treatment in the ground.

Martin A. Kropelnicki: The company put a press release out reaffirming our commitment to our customers that we'll be investing in the $215 million expeditiously.

Martin A. Kropelnicki: P fast treatment in place for approximately 100 wells and all the states that we operate in.

Martin A. Kropelnicki: Overall, it is a group meeting at the parent company project, so we have a project director who is managing the implementation in all of our states, and that group, or that project director reports to the management committee on a normal basis, and we have hit the ground running. We plan to spend probably between $12 and $20 million this year on PFOS treatment, and that'll ramp up.

Martin A. Kropelnicki: Overall, it is a group, meaning at the parent company project.

Martin A. Kropelnicki: So we have a project director, who is managing the implementation and all of our states in that group.

Martin A. Kropelnicki: That project Director reports and the management Committee on a normal basis and we are we have hit the ground running we plan to spend probably between 12 and $20 million. This year on oxi fast treatment and that will ramp up as we go out into the implementation period over the next couple of years.

Martin A. Kropelnicki: Marty, before you move on, you mentioned PFAS, balancing account. I believe that's what you said. It's a memo now. Thank you.

Martin A. Kropelnicki: Marty you before you move on you mentioned FIFA balancing accounts I believe what sort of number of accounts.

Martin A. Kropelnicki: memo account. It is a memo account.

Martin A. Kropelnicki: It is a memo accounts.

Martin A. Kropelnicki: So it's outside the rate case, we're incurring the cost, it goes to the P&L, but we're allowed to track those costs. And we asked the commission to allow us to modify that memo account to pick up the capital tonight. However, capital projects in the rate-making world do accrue an AFUDC allowance for funds used during construction, and that will accrue throughout the process until we put that plan in place.

Martin A. Kropelnicki: Outside the rate case were incurring the cost it goes to the P&L, but we're allowed to track those costs and we asked the commission to allow us to modify that memo account to pick up the capital components, which was denied.

Martin A. Kropelnicki: Our capital projects in the Ratemaking World do accrue UTC allowance for funds used during constructions and outlook throughout the throughout the process until we put that plant in service.

Martin A. Kropelnicki: Moving on to slide 12.

Martin A. Kropelnicki: Moving on to slide 12, where we talk about greenhouse gas emissions in scope one and scope two reduction targets. As we have worked on our decarbonization strategy and our ESG strategy overall over the last five years. We recently made our commitment to reduce absolute scope one and scope two greenhouse gases by 63 percent by 2023 from our baseline 2021 year. Our targets are science aligned, and the team did a very good job working with a third-party advisor to pull that data together.

Martin A. Kropelnicki: When we talk about greenhouse gas and scope, one and scope two reduction targets as we worked on our.

Martin A. Kropelnicki: De carbonization strategy and our ESG strategy overall in the last five years, we recently made our commitment by two reduced absolute scope, one and scope two greenhouse gases by 63% by 2023 from our baseline 2021 year, our Tiger targets, our science aligned which has out there.

Martin A. Kropelnicki: The team has done a very good job of working with a third party advisor to pull that data together.

Martin A. Kropelnicki: We expect to achieve these reductions through a multi-pronged approach consisting of the electrification of the fleet, water conservation, installing on-site solar where it makes sense, and looking at renewable electricity procurement. In other words, making sure we're tapping into the green side of the grid for the power that we use. As many of you may recall, water production and distribution uses a lot of energy.

Martin A. Kropelnicki: We expect to achieve these reductions through a multi pronged approach consisting of the electrification of the fleet water conservation installing onsite solar where it makes sense and looking at renewable electricity procurement in other words, making sure we're tapping into the green side of the grid for the power that we use as <unk>.

Martin A. Kropelnicki: Many of you may recall water production and distribution uses a lot of energy said the more green energy, we can use the more it helps us drive towards that target as well as the other components here and the multi pronged strategy.

Martin A. Kropelnicki: So the more green energy we can use, the more it helps us drive towards that target, as well as the other components here in the multi-pronged strategy. Just as an FYI, the group may evolve its decarbonization strategy, if warranted, due to changes in the industry, working with our regulator, business, and other operating things that may happen, including SEC rules, etc. Overall, we're very committed to delivering value to our customers and stockholders while pursuing these reduction targets and believe it's the right long-term approach as we deal with climate change. So just to kind of recap, very pleased with the start of 2024 and getting the 2021 rate case behind us. It's nice to have that done.

Martin A. Kropelnicki: Just as an FYI group may evolve its de carbonization strategy are warranted due to changes in industry working with our regulator business and other operating things that may happen, including SEC rules et cetera. Overall, we're very committed to delivering value to our customers and stockholders while pursuing these reduction targets and believe it's the right.

Martin A. Kropelnicki: Long term approach as we deal with climate change.

Martin A. Kropelnicki: Going on to slide 13, so just to kind of recap very pleased with the start of 2024 and getting into 2021 rate case behind us.

Martin A. Kropelnicki: Nice to have that done the numbers will be a little confusing obviously when we publish the 10-Q here later on this week there'll be more information. So you can you can strip out what was the retroactive piece and what was the actual piece for the quarter itself.

Martin A. Kropelnicki: The numbers will be a little confusing, obviously, when we publish the 10Q here later this week, there'll be more information so you can strip out what was the retroactive piece and what was the actual piece for the quarter itself. We're going to now turn our focus on implementing our infrastructure improvement plans. As Greg mentioned, we have a lot of capital to get into the ground in addition to the PFAS. So the guidance that Jim gave everyone earlier does not include the $215 million commitment to PFAS or for the forever chemical treatments that we have made to our customers. So that'll be incremental.

Martin A. Kropelnicki: Now turn our focus on implementing our infrastructure improvement plans as Craig mentioned, we have a lot of capital to get into the ground. In addition to the <unk>. So the guidance that Jim gave everyone earlier does not include the $215 million commitment for P. Foster.

Martin A. Kropelnicki: Forever chemical treatments that we've made to our customers so that will be incremental.

Martin A. Kropelnicki: And one other thing to put on everyone's calendar, we have our state Supreme Court dates.

Martin A. Kropelnicki: And one other thing to put on everyone's calendar, we have our state Supreme Court date on May 8. And that will be our oral argument on the RAM decision from the, So we'll look forward to hopefully having some type of decision by the state Supreme Court, probably three months after the oral argument or so. So we're looking forward to having that in court because we believe decoupling is absolutely essential. California, work on climate change resilience.

Martin A. Kropelnicki: On May <unk>.

Martin A. Kropelnicki: May eight.

Martin A. Kropelnicki: And that's our oral arguments.

Martin A. Kropelnicki: On the Ram decision from the commission. So we will look forward to hopefully having.

Martin A. Kropelnicki: Some type of decision by the state Supreme Court, probably three months after the oral argument or so so we're looking forward to having that bancorp because we believe decoupling is absolutely essential to the state of California.

Martin A. Kropelnicki: Work on climate change resiliency and sustainability.

Martin A. Kropelnicki: So, with that, I want to thank everyone for bearing with us through the delays in the 2021 general rate case. I want to thank the rates and accounting team for their hard work. Not only do we have to close out the year, but right after the year, we got the decision. We had to book everything, so the team did a fantastic job getting that stuff all booked in the general ledger, and now we'll move forward on to our 2024 plans, investing in infrastructure, going after PFAS, and getting the PFAS tax cut, and getting our rape case filed for the state of California on or around July 1st So Ellie, with that, let's open it up to questions.

Martin A. Kropelnicki: So with that I want to thank everyone for bearing with us through the delays in the 2021 general rate case, I want to thank the rates and accounting team for their hard work.

Ellie: I think we have to close out the year, but right. After we got the decision we had to book everything So the team did a fantastic job getting that bad stuff all booked in the general Ledger and now we will move forward onto our 2024 plans investing in infrastructure going after <unk> and the <unk> treatment put in place and getting our rate case filed for the state of California.

Martin A. Kropelnicki: On July around on or around July one so early with that let's open it up for questions. Please.

Ellie: Thank you we are now opening the floor for a question and answer session. If you'd like to ask a question. Please press star and number one on your telephone keypad Thats Star and number one on your telephone keypad. Our first question comes from Michael.

Operator: Thank you. We are now opening the floor for a question and answer session. If you'd like to ask a question, please press star and number one on your telephone keypad. Our first question comes from Michael. Govler, from Janie Montgomery Scott, your line is now open. Morning, everyone. Good morning, Michael. I'm just wondering if you could update us on the water supply and water quality.

Operator: Kofler from Janney Montgomery Scott Your line is now open.

Operator: Good morning, everyone.

Operator: Good morning, Michael <unk> Michael.

Michael Govler: Just wondering if you could update us on order supply and water production cost as low as they were.

Michael Govler: They are high in the quarter I know, Jim touched on a little bit and maybe how we should think about that.

Operator: For the remainder of the year.

Michael Govler: Sure Yes.

Martin A. Kropelnicki: Yeah, well, from a water supply perspective, Michael, the state of California is doing very well. I believe our snowpack for the second consecutive year was higher than our 20-year average. And I think it's the first time in an awful long time that we've had two consecutive years where we beat the average.

Michael Govler: Yes, well from a water supply perspective, Michael the state of California is doing very well I believe our snow pack for the second consecutive year was higher than our 20.

Martin A. Kropelnicki: <unk> 20 year average and I think it is the first time an.

Martin A. Kropelnicki: An awful long time that we've had two consecutive years, where we beat the average so I think we're looking good there has been good opportunity also for replenishment of some of our underground Aqua offers throughout the state.

Martin A. Kropelnicki: So I think we're looking good. There's also been a good opportunity for replenishment of some of our underground aquifers throughout the state. In California, I think our other states are also similarly well positioned in terms of actual water supply. We do have some operations in Texas. Most of our utilities down there are wastewater utilities, and I think that we've not seen the current water situation in Texas put any stress on those operations.

Martin A. Kropelnicki: In California, I think our other states are also similarly, well positioned in terms of actual water supply.

Martin A. Kropelnicki: Do have some operations in Texas.

Martin A. Kropelnicki: Most of our <unk>.

Martin A. Kropelnicki: Utilities down there, our wastewater utilities and I think that.

Martin A. Kropelnicki: That we have not seen that.

Martin A. Kropelnicki: Current water situation in Texas put any stress on those operations.

James P. Lynch: As it relates to expenses and water expenses, you know, we do have in California with the new rate case, the new ICBA, which provides us some protection in terms of cost increases in our water production. And so we will lean on that new mechanism and focus on that as our familiarity with the new mechanism becomes greater. And then I'd also like to point out that we did have an increase in other production expenses.

Martin A. Kropelnicki: As it relates to <unk>.

James P. Lynch: Expenses.

James P. Lynch: And water expenses.

James P. Lynch: We do have in California, with the new rate case, the new ice CVA, which provides us some protection in terms of cost increases.

James P. Lynch: In our water production.

James P. Lynch: And and so we will lean on that new mechanism and a focus on that.

James P. Lynch: As as.

James P. Lynch: As the our familiarity with the new mechanism becomes greater.

James P. Lynch: And then I would also like to point out that we did have an increase in other production expenses I mentioned it on our on my in my comments.

James P. Lynch: I mentioned it in my comments, and those were primarily related to the recognition of the deferred RAM revenue. So I would I would view those more as something that will continue to reduce as we as we kind of unwind those deferred revenue costs.

James P. Lynch: And those were primarily related to the recognition of the deferred Ram revenue.

James P. Lynch: So I would I would view those more as something that will continue to reduce as we.

James P. Lynch: As we can.

James P. Lynch: Kind of unwind those deferrals.

James P. Lynch: <unk> revenue cost.

Speaker Change: Yes, one thing I would add is.

Martin A. Kropelnicki: Yeah, one thing I would add, as Jim said, the snowpack was very, very good. The water supply within the state of California, I think, is doing great. California is still in a stage two drought. If you remember, we were racing towards a stage three drought, and then the governor's locked that back. We're still in a stage two drought, which I kind of expect the governor to keep it in stage two or maybe drop it down to stage one, given the longer-term issues of sustainability with the state, climate change, and the variations we get in the weather.

Martin A. Kropelnicki: Just Jim said, the Snowpack was very very good.

Martin A. Kropelnicki: Water supply.

Martin A. Kropelnicki: And within the state of California, I think.

Martin A. Kropelnicki: Doing great.

Martin A. Kropelnicki: <unk> is still in a stage choose route if you remember we are racing towards the stage III drought and the Governor's walk that back we're still in a stage to drought, which I kind of expect the gone hundred as stated in our stage two or maybe drop it down to a stage one given the longer term issues of.

Martin A. Kropelnicki: Sustainability with the state climate change the variations, we get into weather, but overall for 2024, we think we're in good shape in all of our districts.

Martin A. Kropelnicki: But overall, for 2024, we think we're in good shape in all our areas. All right. Thank you, gentlemen. Most helpful. Thanks, Michael.

Speaker Change: Alright, Thank you gentlemen, most helpful.

Speaker Change: Thanks, Michael Thanks, Michael.

Martin A. Kropelnicki: Next question comes from Jonathan Reeder from Wells Fargo. Your line is now open.

Operator: Your next question comes from Jonathan Reeder from Wells Fargo. Your line is now open.

Jonathan Garrett Reeder: Hey, good morning team.

Jonathan Garrett Reeder: Hey, good morning, team. Got a couple questions here, if you don't mind. First, how should we think about the timing of the cash recovery of the retroactive 2023 GRC revenue?

Jonathan Garrett Reeder: Got a couple of questions here, if you don't mind first would be.

Jonathan Garrett Reeder: How should we think about the timing of the cash recovery of the retroactive 2023 JRC revenues.

Greg A. Milleman: Jonathan, this is Greg Milleman. Because of the timing of the 21 decision in our upcoming filing on July 1st in our 24 rate case, we have been focused on implementing the new rate and getting those into effect first, calculating what the lost revenue or the IRMA amount and the MRAM amount will be so that we could book that. We will be filing in the third quarter for recovery of those back monies.

Greg A. Milleman: Jonathan This is Greg relevant we will be because of the timing of the 'twenty one decision and our upcoming filing on July one of our 24 rate case, we have been focused on implementing the new rates.

Greg A. Milleman: And get those into effect first calculating what the lost revenue or the earn out and the ramp about will be so that we could book that we will be filing in the third quarter for recovery of those back.

Greg A. Milleman: We need to go through May 31st when we're planning to have the new rates fully in effect and close out the IRMA account. But then we need some time to put together that filing and start requesting it. So we'll start requesting it in the third quarter. It is based on a per CCF surcharge. So I would imagine in the summer it will be a little bit higher and then, obviously, in the winter months it will be lower and go somewhere from 12 to 24 months.

Greg A. Milleman: Money is we need to go through May 31, when we're planning to have the new rates fully in effect and close out the year of our accounts.

Greg A. Milleman: But we need some time to put together that filing and can start requesting it but we will start requesting it.

Greg A. Milleman: In the third quarter is based on.

Greg A. Milleman: A first Ccs surcharge.

Greg A. Milleman: I would imagine in the summer it will be a little bit higher.

Greg A. Milleman: And then obviously in the winter months lower.

Greg A. Milleman: Go someplace.

Greg A. Milleman: 24 months.

Greg A. Milleman: Okay.

Greg A. Milleman: So it sounds like I mean, those revenues aren't going to really come in in 2024 will probably be more 25% and 26.

Greg A. Milleman: So it sounds like, I mean, those revenues aren't going to really come in in 2024. It'll probably be more like 25 and 26.

Greg A. Milleman: The revenues were booked in the first quarter alright.

Greg A. Milleman: The revenues were booked in the first quarter. Sorry, I thought your question was related to cash.

Speaker Change: Alright Thats all your question was related to cash no exactly yard yet the cash flows won't come in until 'twenty five 'twenty six I apologize.

Greg A. Milleman: No, exactly, you are. Yeah, the cash flows won't come in until 25 and 26, I apologize. Yeah, the one thing

James P. Lynch: Yeah, the one thing I would point out, though, with the timing of when the new rates will go into effect, we will at least experience the positive cash uptick related to those new rates as we go into our more traditionally busy season. So we were pleased to be able to get the rates effective as of June 1.

Greg A. Milleman: Yes, the one thing I would point out, though with the timing of when the new rates will go into effect, we will at least experienced the positive cash uptick related to those new rates as we go into our more traditionally been.

James P. Lynch: Busy season. So we were pleased to be able to to get the rates effective as of June one.

Speaker Change: Got you.

Martin A. Kropelnicki: Gotcha. And then how should we think, I guess, about the $83 million, you know, Rearage Payment Program, cash recovery? potentially like offsetting 2024 external equity needs.

James P. Lynch: And then how should we think I guess about 83 million.

Martin A. Kropelnicki: <unk> payment program cash recovery.

Martin A. Kropelnicki: Potentially like offsetting 2020 for external equity needs.

Speaker Change: Yeah. So.

Martin A. Kropelnicki: Yeah, so if you remember, during COVID, we were decoupled. So the revenue is all accounted for through the decoupling mechanisms from the state of California. So this piece really becomes cash flow. So essentially, customers that have balances that are still past due from the period that I defined, June 16, 2021, through the end of 2022. Those dollars will be applied to their balances, and then we'll also be applying them, to the RAM challenge, to customers as well.

Martin A. Kropelnicki: If you remember during Covid, we were decoupled. So the revenue is all accounted for through the decoupling mechanisms from the state of California. So so this piece really becomes cash flow.

Martin A. Kropelnicki: So essentially customers that have balances that are still past due from the period that I defined.

Martin A. Kropelnicki: June 16, 2021 through the end of 2022 balances those dollars will be applied to their balances and then we'll also be applying some of those balances to the Ram balances have existed for those customers as well so that will all work its way into cash flow, but it won't really have a revenue effect.

Martin A. Kropelnicki: So that'll all work its way into cash flow, but it won't really have a revenue effect; it'll have an effect on the aged receivables that are still outstanding during COVID. And you'll see a pickup in cash flow. So certainly, that helps the company from going to the market and needing to issue equity right away. Obviously, water utility stocks will outperform over 2023. Everyone was down 20 plus percent. So we're not racing the market anymore to go sell stocks. And Jim's not throwing any pieces of paper at me for saying that.

Martin A. Kropelnicki: It will have an effect on the aged receivables that are still outstanding during COVID-19 and youll see a pickup in cash flow, so certainly that debt.

Martin A. Kropelnicki: It helps the company from going to the market and needing to issue equity right away, obviously water utility stocks over 2023.

Martin A. Kropelnicki: Everyone was down 20%, so we're not racing to market anytime soon to to go sell stock.

Speaker Change: And Jim's not thrown any pieces of paper at me for saying that but.

Martin A. Kropelnicki: But the reality is with this rate case, and with the step-up in the rate design, the movement from fixed or from variable to more being more recovered and fixed, that's all going to help us throughout this year. But you know, if you think about our capital needs, we're still investing at three times our depreciation rate. And, as Greg mentioned, we got 86% of our asks; it's a $1.2 billion capital program

Martin A. Kropelnicki: But the reality is with this rate case and what the step up in the rate design the movement from fixed or from variable to more being more recovered six that's all going to help us throughout this year, but if you think about our capital needs. We're still investing at three times, our depreciation rate.

Martin A. Kropelnicki: And.

Martin A. Kropelnicki: As Greg mentioned, we got 86% of our assets of $1 $2 billion capital program. So we do have adequate lines et cetera, but Jim and I will be evaluating that as we go throughout the year to define what those needs are obviously with interest carrying cost being higher.

Martin A. Kropelnicki: So we do have adequate lines, etc., but Jim and I will be evaluating that as we go throughout the year to define what those needs are. Obviously, with interest carrying costs being higher, you know, the stock being down, and we still got to get our job done, there's a fine line that we'll be looking at our cap structure and trying to optimize that on behalf of our stockholders, but also our customers as well, because it helps play into affordability.

Martin A. Kropelnicki: The stock being down and we still got to get our job done there is a fine line there that we'll be looking at our cap structure and trying to optimize that on behalf of our stockholders, but also our customers as well because it helps play into affordability.

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

Martin A. Kropelnicki: Okay, so in terms of the absolute size of annual equity needs, that's still to be determined at this point.

Martin A. Kropelnicki: Yes, I think I think so John the real good news is that.

James P. Lynch: Yeah, I think I think so. You know, John, the real good news is that from the recognition of the 2023, our ability to recognize the 2023 impact of the 2021 decision has brought us back to where we had hoped we would be at this point in time relative to our cap structure, which is, you know, very close to our authorized cap structure. So there's not a need right now in terms of forcing us, I wouldn't say forcing us, but directing us to which particular capital we would pursue in the event that we needed to pursue capital.

James P. Lynch: From the recognition of the 2023, our ability to recognize the 2023 impact of the.

James P. Lynch: The 2021 decision.

James P. Lynch: As.

James P. Lynch: <unk> brought us back to where we had hoped we would be at this point in time relative to our cap structure, which is.

James P. Lynch: Very close to our authorized.

James P. Lynch: Structure, so there's not a.

James P. Lynch: Need right now in terms of <unk>.

James P. Lynch: Forcing us I wouldn't say, forcing us, but directing us into which particular capital.

James P. Lynch: We would pursue in the event that we needed to pursue capital and so I think right now we've got a lot of availability on our line of credit we understand that the interest rates are still inverted. So we'll be taking a look at short term versus long term debt.

James P. Lynch: And so I think right now that we've got a lot of availability on our line of credit; we understand that interest rates are still inverted. So we'll be taking a look at short-term versus long-term debt, amongst other things, as we move forward. But it's only with the booking of the current rate case results, the 2021 rate case results, that we're in the position now to kind of forecast out what we think we might need from a capital perspective for the remaining of the year. Yeah, we're also benefiting from the higher ROE that way.

James P. Lynch: Amongst other things as we move forward, but.

James P. Lynch: It's only with the booking of the current.

James P. Lynch: Our rate case results to 2021 rate case results that were in a position now to kind of forecast out what we think we might need from a capital perspective for the remaining of the year. We're also benefited from the higher ROE that went into effect on January one the 10, two southern Rfps Thats also helping us with our cash flows.

James P. Lynch: Yeah, we're also benefiting from the higher ROE that went into effect in January.

Speaker Change: Yes, sure glad you brought up the ROE kind of leads into the next question because.

Martin A. Kropelnicki: Yeah, sure. Well, you brought up the ROE, and that kind of leads into the next question, because I guess just given the GRC's final outcome and, you know, recovery of some of the CapEx through the advice letter recovery process, where do you expect your earned ROEs in 2024 and 2025 to come in relative to the allowed levels? Oh, that's it.

Martin A. Kropelnicki: I guess, just given the <unk> final outcome in recovery of some of the Capex or the advice letter recovery process, where do you expect your earned ROE and $24 25 to come in relative to the allowed levels.

Speaker Change: Oh, that's a that's a very good question 25, certainly.

Martin A. Kropelnicki: Oh, that's a very good question. 25 is certainly a little harder to talk about, but from a budgeting perspective and how we manage the company, right, we try to drive towards hitting that ROE. Obviously, when you have a delayed rate case, it throws everything kind of off balance, significantly off balance. So I think for 2024, we should be at, or maybe slightly above that ROE for 2025. You start to get the period of regulatory lag that starts to seep in, and obviously inflation's a big deal. Getting back to Michael Gogler's questions about production costs, you know, in Northern California, for time of use rates for electricity, it's now 40 to 50 cents a kilowatt hour, the highest cost in the US.

Martin A. Kropelnicki: Harder to talk about but from a budgeting perspective.

Martin A. Kropelnicki: How we manage the company right, we try to drive towards hitting that Roe.

Martin A. Kropelnicki: Obviously, when you have a delayed rate case, it throws everything kind of off balance significantly off balance. So I think for 2024, we should be at or maybe slightly above that ROE for 2025, you start to get the period of regulatory lag starts to seep in and obviously inflation is a big deal.

Martin A. Kropelnicki: Getting back to Michael <unk> questions about how about production costs.

Martin A. Kropelnicki: Northern California for time of use rates for electricity is now 40% to 50 kilowatt hour highest cost in the U S. So that's stuff that affects the operating side that will also lag and hopefully somebody will get picked up in the rate case as inflation stays high a lot of it gets pushed out into the next rate filings. So certainly for 2020.

Martin A. Kropelnicki: So that's stuff that affects the operating side that, you know, will also lag, and hopefully, some of it will get picked up in the rate case. But as inflation stays high, a lot of it gets pushed out into the next rate. So certainly, for 2024, I think we're in excellent shape. For 2025, you know, we're going to budget our ROE. And that's kind of our job. And I think, as Jim talked about, there is an opportunity with inverted interest rates, short term versus long term, how we finance things, we're, you know, we're going to take a look at all that, because our job is to operate as efficiently as possible while earning the ROE for our stockholders and keeping rates affordable for our customers. So 25 hard to comment on, 24 we're going to drive hard at the ROA.

Martin A. Kropelnicki: I think were excellent shape for 2025, we're going to budget at Ro <unk> and <unk>.

Martin A. Kropelnicki: That's kind of our job and I think as Jim talked about plant is there opportunity with inverted interest rates short term versus long term.

Martin A. Kropelnicki: How we finance things, where we're going to take a look at all of that because our job is to operate as efficiently as possible.

Martin A. Kropelnicki: Earning Roe for our stockholders and keeping rates affordable for our customers. So 25 hard to comment on 24, we're going to drive hard to hit the road.

Martin A. Kropelnicki: Okay, and then lastly, I know you said you filed for $39 million of the advice letter recovery projects already.

Martin A. Kropelnicki: Okay, and then lastly, I know you said you filed for 39 million in advice letter recovery projects already. How much do you expect to file, you know?

Martin A. Kropelnicki: How much do you expect to file.

Martin A. Kropelnicki: In total in 2024, and then what about 2025.

Martin A. Kropelnicki: You know, it's to be determined. Jonathan, if anyone listened to the rate proceeding, I thought it was kind of fascinating because the commission was really kind of focused on these 335 projects the company didn't get done, or they only got done five of these 335 projects. But, as you know, numbers are relevant, right? And so, during this three-year period, we probably had 5,000, 6,000 total projects that we completed. These aren't talked about; they were just focused on these 335 projects that didn't get done.

Martin A. Kropelnicki: It has to be determined Jonathan.

Martin A. Kropelnicki: Anyone listened into the rate proceeding.

Martin A. Kropelnicki: I thought it was kind of fascinating because the commission was really kind of focused on phase 335 projects. The company didn't get done or they only got done five of these 335 projects.

Martin A. Kropelnicki: But as you know numbers are relevant and so during this three year period, we probably had 5000 6000 total projects that we completed those arent talked about they were just focused on these 335 projects that didn't get done theres two failures that I see in the rate making process in the state of California.

Martin A. Kropelnicki: There are two failures that I see in the rate making process in the state of California. One is the failure to recognize that projects now go through one or two and even three rate cage cycles. So you want to put a well in Southern California, you know, by the time you procure the land, design the well, get sign up on the treatment, build the treatment, go through testing, put it in service, it's longer than three years.

Martin A. Kropelnicki: One is the failure to recognize that projects now go through one or two and even three rate case cycles. So you want to put a well in southern California.

Martin A. Kropelnicki: By the time, you procure the land designed well get sign off on the treatment build the treatment go through testing put it and put it in service it's longer than three years and so the ratemaking process in California fails to recognize these projects now are multi cycle projects the second thing.

Martin A. Kropelnicki: And so the rate-making process in California fails to recognize that these projects now are multi-cycle. The second thing that the Commission fails to recognize in the rate-making process is that as these projects get more complicated and go farther in time, the level of contingency needed for those projects goes up. And if you listen to the hearing, the commission tossed out a lot of the contingencies associated with it. So those are the two things that Greg has to work on in the 2024 rate case.

Martin A. Kropelnicki: The commission fails to recognize the rate making process is as these projects projects get more complicated and go out farther in time the level of contingency needed for those projects goes up.

Martin A. Kropelnicki: And if you listened to the area that the commission tossed out a lot of the contingencies associated with these projects. So those are the two things that Greg has to work on in the 2024 rate case.

Martin A. Kropelnicki: Obviously, they're kind of inbred into the process in the rate-making process within the state of California. But those are two of the things we're going to be focusing on in 2024 because both those things help lead to regulatory lag. And, you know, the reality is, and you've followed us for a long time, we're very good at hitting our capital commitment numbers and getting that capital on the ground, right? It's really about on the backside of the rate making process.

Martin A. Kropelnicki: Obviously, they're kind of in bread into the process and the ratemaking process within the state of California, but those are the two of the things we're going to be focusing on in 2024, because both those things help lead to regulatory lag and.

Martin A. Kropelnicki: The reality is and you've followed us for a long time, we're very good about getting our capital commitment numbers and getting that capital in the ground right. It's really about on the backside, the ratemaking process and efficiency of the rate making process. So.

Martin A. Kropelnicki: We will have to see what happens next but.

Martin A. Kropelnicki: So we'll have to see what happens next, but, you know, I think we'll keep doing what we're doing, and we're going to keep investing at three times the depreciation rate, which I think benefits our stockholders while focusing on affordability.

Martin A. Kropelnicki: I think we'll keep doing what we're doing and we're going to keep investing at three times, the depreciation rate, which I think benefits our stockholders will focusing on affordability.

Martin A. Kropelnicki: Okay, but out of those $160 million project.

Martin A. Kropelnicki: Okay, but out of those 160 million projects, do you expect to complete them all over the course of 2024 and 2025, or might some of those fall into the next rate case cycle still?

Martin A. Kropelnicki: Do you expect to like complete them all over the course of 2024 and 2025 or.

Martin A. Kropelnicki: Some of those fall into the next rate case cycle still.

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

Martin A. Kropelnicki: Yes.

Martin A. Kropelnicki: We have a concerted effort going on right now to reevaluate those projects from two perspectives one to confirm that they are still need it in two.

Greg A. Milleman: To make sure.

Greg A. Milleman: Regards to that first point to make sure they werent just.

Greg A. Milleman: Projects that we have subsequently found other alternatives for.

Greg A. Milleman: And two.

Greg A. Milleman: To really identify what time period, we are going to complete the projects and put them in service.

Greg A. Milleman: For those for those that remain out of the $160 million.

Greg A. Milleman: So at this point I think that process is still underway.

Greg A. Milleman: And we'll have a better sense for the timing of that here in the next couple of weeks.

Speaker Change: Okay. Thanks, I appreciate you taking my questions.

Jonathan Garrett Reeder: Okay, thanks. I appreciate you taking my questions. Thanks, Jonathan. Take care.

Speaker Change: Thanks, John and we'll take care Jonathan.

Angie: Question comes from Angie.

Operator: Thanks, Jonathan. Take care, Jonathan

Operator: The question comes from Angie Storins from Seaport Research Partners. Your line is now open.

Speaker Change: Starting from Seaport Research partners. Your line is now open.

Agnieszka Anna Storozynski: Thank you. So first maybe you alluded to the 10-Q, which will have more information about the retroactive.

Agnieszka Anna Storozynski: Thank you. So first, maybe you alluded to the 10Q, which will have more information about the retroactive impacts on the first quarter earnings. But can you just give us a sense, like roughly what it is from an EPS perspective versus the dollar 21 that you reported?

Agnieszka Anna Storozynski: Impact on the first quarter earnings, but can you just give us a sense like roughly what it is from an EPS perspective versus that 21 that you reported.

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

James P. Lynch: Well, we haven't broken it down from an earnings per share perspective, but relatively speaking there was approximately $90 million.

James P. Lynch: Earnings of revenue that was included in the.

James P. Lynch: The 2024 first quarter that related to.

James P. Lynch: Yes.

James P. Lynch: The decision.

James P. Lynch: And in addition to that there was a.

James P. Lynch: An incremental about $8 5 million.

James P. Lynch: Of expenses that related to the decision.

Agnieszka Anna Storozynski: Okay, I mean, it's that you don't have guidance. So that's actually pretty important for us to have a basis from which to extrapolate, right. So, again, we would probably appreciate it going forward. Secondly, on the PFAS spending, will you be booking AFUDC earnings associated with this CAPEX? So will it flow through the income statement?

Agnieszka Anna Storozynski: Okay.

Agnieszka Anna Storozynski: And you don't have guidance, so that's pretty important for us to have.

Agnieszka Anna Storozynski: Hff's to extrapolate from right so.

Agnieszka Anna Storozynski: Again, we would probably appreciate it going forward.

Agnieszka Anna Storozynski: Secondly on the PFS spending so.

Agnieszka Anna Storozynski: So.

Agnieszka Anna Storozynski: So will you be booking ACDC earnings associated with this capex, so will it flow through the <unk>.

Agnieszka Anna Storozynski: The income statement.

Agnieszka Anna Storozynski: Well.

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

Agnieszka Anna Storozynski: UDC is we are eligible to use the AFDC mechanism as we move forward with those expenditures so.

James P. Lynch: The the way Youre asking the question, we will be able to reduce our interest expense for the <unk> do you see to the extent that we are making expenditures related to those projects.

Agnieszka Anna Storozynski: Okay, and then on interest in general for PFAS, so we're starting to see some losses against investor-owned utilities related to PFAS, you know, the fact that, you know, you or, in general, utilities were not attempting to remove the forever chemicals from distributed water in the past. And I'm just wondering, you know, how you can protect yourself. Is there anything in California that would allow you to, you know, limit the litigation risk and, more importantly, limit any earnings?

Speaker Change: Okay and then on.

Agnieszka Anna Storozynski: Just in general on PFS, So we're starting to see some.

Agnieszka Anna Storozynski: Lawsuits against Investor owned utilities.

Agnieszka Anna Storozynski: Related to <unk>.

Agnieszka Anna Storozynski: The fact that.

Agnieszka Anna Storozynski: Yes.

Speaker Change: <unk> you.

Agnieszka Anna Storozynski: Or in general utilities went out.

Agnieszka Anna Storozynski: Attempting to remove that.

Agnieszka Anna Storozynski: Forever chemicals from from distributed water in the past and I'm just wondering how you can protect yourself is there anything.

Agnieszka Anna Storozynski: In California that would allow you to.

Agnieszka Anna Storozynski: Limit the litigation risk and more importantly limit any earnings impact.

Martin A. Kropelnicki: Yeah, I think from a liability standpoint, in California, we have Hartwell, which basically says, if we're operating in accordance with the rules set forth by our regulator, that we have protection. So I'm not too worried about California compared to some of the stuff that we're seeing on the East Coast in terms of product liability, water, et cetera.

Speaker Change: Yes, I think from a liability standpoint in California.

Martin A. Kropelnicki: Hartwell, which basically hartwell decision, which basically says if we're operating in accordance with the rules set forth by our regulator.

Martin A. Kropelnicki: We have protection.

Martin A. Kropelnicki: So I don't Im not too worried about California compared to some of the stuff that we're seeing on the east coast in terms of product liability associated with water X et cetera.

Martin A. Kropelnicki: From an earnings perspective, as Jim said, we'll accrue AFUDC on those capital projects. Most of the treatment is capital, and it's 100 wells out of 1,170 wells total that we have within the group. So we'll accumulate the AFUDC on that, and then those other capital costs get picked up, and any of the operating costs... Once we put those vessels into production, we'll track incremental costs through the memo account at a later date. So I think we have kind of all the pieces in place that we need to have.

Martin A. Kropelnicki: From an earnings perspective, as Jim said, it will accrue <unk> CNS capital projects most of the treatment is capital.

Martin A. Kropelnicki: And it is a 100 wells out of 1100 70 wells total that we have with <unk> group.

Martin A. Kropelnicki: So look we will accumulate AFDC on that and then those other capital costs get picked up in any of the operating costs. Once we put those vessels into production will attract incremental costs through the through the memo account and seek recovery of that at a later date. So I think we got kind of all the pieces in place that we.

Martin A. Kropelnicki: You need to have I wish is disappointed in the commission's decision not to recognize the capital now because the EPS, but that new standard out there. They did extend the implementation timeline I think I believe it's over five years now versus over three but you got any customers don't want to hear we're going to implement P. Fast treatment for five years from now at <unk>.

Martin A. Kropelnicki: I was just disappointed in the commission's decision not to recognize that capital now because the EPS put that new standard out there. However, they did extend the implementation timeline. I think I believe it's been over five years now versus over three. But customers don't want to hear we're going to implement PFAS treatment four and a half years from now. If Jim's drinking water that's PFAS, then he wants to know we're treating it right away. And so that's why when we put our press release out, we pointed out we were disappointed in the commission's decision.

Martin A. Kropelnicki: Wanted to ask P. Boston, he wants to know where treatment right away and so that's why when we put our press release that we pointed out we were disappointed in the commission's decision and despite that we reaffirmed our commitment to using that capital in the ground as quickly as possible and so from an operating cost perspective.

Martin A. Kropelnicki: And despite that, we reaffirmed our commitment to get that capital in the ground as quickly as possible. And so from an operating cost perspective, I'm not too worried about it. To me, it's about making sure the water is safe for customers and implementing that capital as quickly as possible.

Martin A. Kropelnicki: I'm not too worried about it to me, it's about making sure the water safe for customers and implementing that capital as quickly as possible.

Martin A. Kropelnicki: And then just one other point on that and we are pursuing any available.

James P. Lynch: And then, just one other point on that, Angie, we are pursuing any available grant money that may be out there to assist with the whole PFAS issue, as well as potential third-party liability.

James P. Lynch: That may be.

James P. Lynch: Out there to assist with that with the <unk> issue as well as potential third party liability.

Martin A. Kropelnicki: Yeah, there's a lot of litigation around PFAS with the polluters, and there's been a ton of press on that. I don't want to get into the particulars of the case because we're a member of the action against the polluters, but we believe we'll get some dollars back from the polluters to offset the implementation costs and the capital costs of putting PFAS treatment in place.

James P. Lynch: Yes, Theres a lot of litigation around.

Martin A. Kropelnicki: <unk> <unk> to the actually to the polluters and there's been a ton of press on that I don't want to get into the particulars of the case because we are.

Martin A. Kropelnicki: A member of the action against the polluters, but we believe we will get some some dollars back from the polluters to offset the implementation costs and the capital costs of putting P fast treatment in place.

Speaker Change: Okay, and then lastly.

Agnieszka Anna Storozynski: And lastly, you mentioned the weak performance of water utility stocks and the timing of your future equity needs. I'm just wondering, Ito, you raised your dividend by I think 7%, 7-something percent. Do you think that, going forward, depending on the stock performance, the growth in dividends is a lever for you to potentially use to adjust downwards? If you have higher equity needs, is this a lever in this high interest rate environment as well? Again, what is this 7% plus?

Martin A. Kropelnicki: So you mentioned.

Agnieszka Anna Storozynski: The weak performance of water utility stocks.

Agnieszka Anna Storozynski: And the.

Agnieszka Anna Storozynski: The timing of CLR future equity needs I'm, just wondering you till you raised your dividend by.

Agnieszka Anna Storozynski: 77% 70 something percent. So is this do you think that going forward, depending on the stock performance the growth in dividends is a lever for you too.

Agnieszka Anna Storozynski: When should we use to.

Agnieszka Anna Storozynski: Adjust downwards.

Agnieszka Anna Storozynski: And.

Agnieszka Anna Storozynski: If you have.

Agnieszka Anna Storozynski: Higher equity needs.

Agnieszka Anna Storozynski: It's just a matter in this high interest rate environment as well.

Martin A. Kropelnicki: Sure. Well, if you go back to our... Yeah, if you look at our dividend increases over the last five years, they've been above inflation. You know, we have a payout ratio target between 55 and 65%. We try to manage within that range. Personally, I personally believe that the compound annual growth rate of dividends is one of the key drivers of equity valuation in the marketplace. So, you know, looking at that CAGR number, as Jim mentioned, we've grown the dividend every year for the last 57 years, so I have no reason to believe we won't continue down that path.

Martin A. Kropelnicki: Again.

Martin A. Kropelnicki: What is the 7% plus linked to share.

Martin A. Kropelnicki: Sure.

Martin A. Kropelnicki: Back to production.

Martin A. Kropelnicki: Yes, if you look at our dividend increases over the last five years, they've been above inflation, we have a payout ratio target of between 55 and 65% we try to manage within that range.

Martin A. Kropelnicki: I personally believe that our compound annual growth rate of dividends is one of the key drivers to equity valuation in the marketplace.

Martin A. Kropelnicki: So looking at that CAGR number.

Martin A. Kropelnicki: As Jim mentioned, we've grown the dividend every year for the last 57 years. So I have no reason to believe we won't continue down that path, obviously, when the board looks at that we look at.

Martin A. Kropelnicki: Obviously, when the board looks at that, we look at, you know, what are the general market conditions? What was the dividend growth rate of other utilities? What are our capital needs? And we try to keep that all in balance. But obviously, for me personally, I think dividend growth is a key thing that our investors expect, and they like to see, and they like the stability of a water company. So to me, yes, it was a bleak year for water utilities in 2023.

Martin A. Kropelnicki: What's the general market conditions, what was the dividend growth rate of other other utilities.

Martin A. Kropelnicki: What are our capital needs and we try to keep that all in balance, but obviously for me personally I think dividend growth is a key thing that our investors expect and they like to see and they like the stability of a water company. So to me yes. It was it was it was a bare year for water utilities in 2023, but I think.

Martin A. Kropelnicki: But I think the three most important things we can do. You know, make sure water quality is the most important thing on our operating list. Continue investing at that three times depreciation rate and keep growing that dividend. And I guess the fourth thing is making sure our customer service stays outstanding and best in class. We do those things in the long run. We create value for stockholders.

Martin A. Kropelnicki: Three most important things we can do.

Martin A. Kropelnicki: Make sure water quality is the most important thing on our operating list.

Martin A. Kropelnicki: <unk> investing at that three times, the depreciation rate can keep growing that dividend and I guess, the first thing is making sure our customer service stays outstanding and best in class, we do those things in the long run you create value for stockholders.

Agnieszka Anna Storozynski: Very good. Thank you.

Martin A. Kropelnicki: Okay.

Speaker Change: Okay. Good thank you.

Speaker Change: Thanks and have a good day.

Operator: and comes from Davis Sunderland from Baird. Your line is now open.

Agnieszka Anna Storozynski: Okay.

Operator: It comes from Davis Sunderland from Baird. Your line is now open.

Davis B Sunderland: Hey, Jim.

Davis B Sunderland: Hey, Jim. Howdy, Greg. Good morning. Let's take some questions.

Davis B Sunderland: Good morning, so good questions.

Davis B Sunderland: Questions.

James P. Lynch: Hey Davis, good morning. Thanks for joining us.

Davis B Sunderland: Hey, David Good morning, Thanks for joining us.

Davis B Sunderland: I wanted to ask a PFAS question. As relates to the business development plan, I guess maybe a real quick, will any updates on that matter be noted, but specifically, has the PFAS created any opportunity for you guys to be more aggressive or more interested or, I guess, take a closer look at any systems who may have difficulty reaching out?

Davis B Sunderland: I wanted to ask DFAST.

Davis B Sunderland: As it relates to business development yesterday.

Davis B Sunderland: Does any updates on that.

Davis B Sunderland: But.

Davis B Sunderland: It has to create.

Davis B Sunderland: Created any opportunity for you guys.

Davis B Sunderland: More aggressive.

Speaker Change: Yes take a closer look at.

Davis B Sunderland: Hmm.

Davis B Sunderland: You know, Davis, we got about every third word there that you were cutting out.

Speaker Change: You may have.

Davis B Sunderland: <unk> reached.

Davis B Sunderland: Okay.

Davis B Sunderland: David We got about every third word there you were cutting out.

Greg A. Milleman: I'm going to answer a question that I think you asked, or at least I'll rephrase it for Marty. Davis, it sounded like you said, with PFAS out there, if we took a look at the business opportunities that are also out in the market right now that we may be pursuing, how are we considering the potential PFAS liability, and is that coloring our desire or interest in some of those potential opportunities?

Davis B Sunderland: Could you one of you guys I think I think I mean.

Greg A. Milleman: To answer a question that I think you asked.

Greg A. Milleman: Or at least I'll rephrase the question for Marty.

Greg A. Milleman: Davis it sounded like.

Greg A. Milleman: You said with <unk> out there.

Greg A. Milleman: If we took a look at the business opportunities that are also out in the market right now that we may be pursuing.

Greg A. Milleman: How are we considering the potential fast liability.

Greg A. Milleman: Is that coloring our.

Greg A. Milleman: Desire or interest in some of those potential opportunities.

James P. Lynch: Wow, you can hear that in that question? That's incredible. Let's ask if that's the right question, Davis. You got Gert Ehrs type on this for that, what is that?

Greg A. Milleman: You can hear that in that question Thats incorrect, but let's say it's bad.

James P. Lynch: We will have to ask if that's not the right question Davis.

Speaker Change: Hey, guys.

James P. Lynch: With us.

James P. Lynch: And as we said wed generate greater so let me answer that question yes.

Martin A. Kropelnicki: So let me answer that question. Yeah, you know, I think, obviously, the cost of capital has gotten a lot more expensive. And from a business development standpoint, we haven't, We've seen maybe a little bit of a slowdown in things that go into our pipeline from a business development standpoint, but our business development team continues to be very, very busy. As Jim mentioned, you know, the stuff we got going on in Texas and other things we're doing in other states.

Speaker Change: I think.

Martin A. Kropelnicki: Obviously, the cost of capital has gotten a lot more expensive.

Martin A. Kropelnicki: And from a business development standpoint, we haven't.

Martin A. Kropelnicki: Seem maybe a little bit of slowdown in things that go into our pipeline from a business development standpoint.

Martin A. Kropelnicki: But our business development team continues to be very very busy as Jim as Jim mentioned the stuff, we've got going on in Texas and other things we're doing in other states.

Martin A. Kropelnicki: So I think, you know, the PFAS thing. I think the smaller systems are going to struggle to be in compliance. And, you know, for us, there are 100 wells, it's $215 million. And we're fairly good at implementing that type of treatment. We're very fast, and we try to keep our overhead fairly low.

Martin A. Kropelnicki: So I think the P. Fast thing I think the smaller systems or have struggled to being in compliance and you think about for US. There's a 100 wells is $215 million and we're fairly good at implementing that type of treatment were very fast and we try to keep our overhead fairly low.

Martin A. Kropelnicki: If a smaller system doesn't have access to capital or they don't have the technical resources on site to figure out what the treatments should be it's going to affect their ability to operate.

Martin A. Kropelnicki: If a smaller system doesn't have access to capital, or if they don't have the technical resources on site to figure out what the treatment should be, it's going to affect their ability to operate. I think the broader operating issue is for companies like Cal Water or for Essential or Aqua or SGW or Middlesex, any of us that are public traded companies, you know, you fall out of compliance, and the regulator finds the hell out of you, or you end up getting sued by somebody, right?

Martin A. Kropelnicki: <unk>.

Martin A. Kropelnicki: The broader operating issue is for companies like Cal water or for essential our Aqua SJW, our Middlesex any of us that are public traded companies.

Martin A. Kropelnicki: You thought of compliance and the regulator finds the Hell out of you already end up getting sued by somebody.

Martin A. Kropelnicki: So, you know, we generally operate to the highest standards possible associated with that. But when you're a municipal system, what's the recourse? and you think about the 60,000 systems out there that fall under the purview of the EPA, there's no way they can effectively monitor all those systems to make sure they're in compliance with PFOA and PFOS. And so I give them credit for, you know, trying to push through the PFOS treatment, get the EPA to move quicker. I think that's really important. But, you know, you'll have compliance lags on the municipal side where I don't think you're going to have that same problem on the investor-owned side.

Martin A. Kropelnicki: Sure.

Martin A. Kropelnicki: So we.

Martin A. Kropelnicki: We generally operate.

Martin A. Kropelnicki: To the highest standards parcel would be associated when youre a municipal system, what's the recourse and you think about the 60000 systems out there that fall under the purview of the EPA Theres no way they can effectively monitor all those systems to make sure they're in compliance with <unk>. So.

Martin A. Kropelnicki: I give the buy demonstration credit for.

Martin A. Kropelnicki: I'm trying to push through the peak loss treatment get the EPA to move quicker I think that's really important but youll have compliance lags on the municipal side, where I don't think you're going to have that same problem on the investor owned side.

James P. Lynch: Yeah, and I think, as a result of Marty's observations on that, we do think that, as with any new regulation that comes out, it will put financial stress on some systems. And that may open up the market. And yes, if we believe we could assist customers in those markets, we would be interested in taking a look at those systems. Right? But even then, Jimmy, one of the things that happened, we took over a system, and we got liability on day one. So if you look at some of the work we've done, like in

Martin A. Kropelnicki: Yeah, and I think I think as a result of.

James P. Lynch: Marty's observations on that.

James P. Lynch: We do think that as with any new regulation that comes out it will put financial stress on some systems and that May open up the market.

James P. Lynch: And yes, if we believe we could assist the customers in those markets, we would be interested in taking a look at those systems.

James P. Lynch: But even then Jim is one of the things that happens we take over a system, we got a liability David Brian. So if you look at some of the work we've done like in new Mexico, or we've taken over trouble systems were barely very closely with the regulator to get the rates paid upfront before we buy them that we have in implementation timeline. So we don't get paid on the back side with these panel.

Martin A. Kropelnicki: to get the rates paid up front before we buy them, and that we have an implementation timeline so we don't get pinged on the backside with these penalties and fines. Because I think in the water world, investor-owned utilities are the deep pocket for the regulators to define.

Martin A. Kropelnicki: <unk> and <unk>, because I think in the water world the Investor owned utilities are the deep pocket for the regulators to define.

Martin A. Kropelnicki: Yeah.

Martin A. Kropelnicki: Correct.

Davis B Sunderland: Apologize for the audio and for the time, guys. All right, Davis, thank you.

Speaker Change: All right.

Speaker Change: For the time guys.

Speaker Change: Hi, David. Thank you. Thank you Jim good areas that was impressive you can think can decipher that.

James P. Lynch: All right, Davis. Thank you. Thank you, Jim. Good airs. That was impressive. You could you could be fired for that.

Speaker Change: Thank you and just right now we don't have any raised hands.

Operator: Thank you. As of right now, we don't have any raised hands. So I'd like to hand it back over to the management for their final remarks. All right, Kelly. Thank you.

Kelly: Like to hand back over to the management wanted to final remarks.

Martin A. Kropelnicki: All right, Ellie, thank you. Well, everyone, thanks for joining us today. Obviously, there's a lot going on, but at least one thing is off the list, the 2021 general rate case. That's in the rearview mirror.

Kelly: Alright, thank you.

Speaker Change: Everyone. Thanks for joining us today, obviously, there's a lot going on but at least one thing is off the list for 2021 General rate case, that's in the rearview mirror, obviously theres a lot of work to do on the tariffs and filing the <unk>.

Martin A. Kropelnicki: Obviously, there's a lot of work to do on the tariffs and filing the required documentation with the commission to start the collection of the retroactive piece. We'll be in a better position on our Q2 earnings call to talk about that. And then, between now and then, we'll be working on our 2024 general rate case and preparing for the state Supreme Court oral arguments on May 8th. So thank you for joining us today, and we look forward to talking to everyone really, really soon. Have a good day!

Martin A. Kropelnicki: Required documentation with the commission to start the collection of the retroactive piece will be in a better position on our Q2 earnings call to talk about that.

Martin A. Kropelnicki: And then in between now and then we'll be working on our 2024 general rate case and preparing for the state Supreme Court arguments on May eight so thank you for joining us today, and we look forward to talking to everyone really really soon have a good day.

Operator: Thank you all for attending today's conference call. We hope you have a wonderful day. You may now all disconnect from the session.

Operator: Thank you all for attending today's conference call. We hope you have a wonderful day you may now all disconnect.