Thank you for standing by. My name is Kathleen, and I will be your conference operator today. At this time, I would like to welcome everyone to the California Water Service Group Third Quarter 2024 Earnings Call. [Operator Instructions]. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions]. And now I would like to turn the call over to Jim Lynch, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, Kathleen. Welcome, everyone, to our third quarter 2024 results call for California Water Service Group. 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 earnings release. which was issued earlier today. The replay will be available until December 30, 2024. As a reminder, before we begin, the company has a slide deck to accompany today's earnings call. The slide deck was furnished with an 8-K and is also available at the company's website at www.calwatergroup.com. Before looking at third quarter 2024 results, I'd like to take a few moments to address 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. As a result, 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 Form 10-K, Form 10-Qs, press releases and other reports filed from time to time with the Securities and Exchange Commission. And now I'll turn the call over to Marty.

Thanks, Jim. Good morning, everyone, and happy Halloween. We're happy you can join us here today. I'm very pleased to share with you our results for the third quarter of 2024. There's really 5 main topics that we want to cover today. The first one being our strong third quarter financial performance that continues to benefit from the regulatory release date of California. We want to give an update on the 2024 general rate case, where during the quarter, we had our initial preconference and we've been assigned an administrative law judge and a commissioner to oversee our case. We received approval of certain advice letters from the California Public Utilities Commission that's going to allow us to collect $94.2 million in certain regulatory balances through 2027. We want to talk about the record amount of capital that we've invested this year and what that looks like going into year-end. And then lastly, take a moment to talk about our continued environmental leadership and corporate recognition and talk about a few awards that we won during the quarter. But to start things off, let's do like we typically do and have Jim Lynch take you through some of the financial analysis that highlights the quarterly results. Jim, back to you.

So as Marty mentioned, our Q3 2024 financial results continue to benefit from new rates and the rate structure authorized in our 2021 California GRC. As a result, our operating revenue for the quarter increased 17.5% to $299.6 million compared to our prior year Q3 operating revenue of $255 million. Net income for the quarter was $60.7 million or $1.03 per diluted share compared to $34.4 million or $0.60 per diluted share in Q3 of 2023. The $44.6 million increase in Q3 2024 revenue was driven primarily by a $42.2 million increase in rates billed to customers as authorized in our regulatory filings and an increase in customer usage, including usage by new customers of $9.6 million. These increases were offset by a $9.4 million reduction in our Monterrey water rate adjustment mechanism, or our [ MRAM]. Recall that the MRAM is a rate adjustment mechanism that includes a tiered rate structure is usage. In periods of warm dry weather when usage increases, the MRAM typically decreases. The balance typically increases in cooler wet weather when usage declines. Q3 2024 operating expenses were $232.8 million compared to Q3 2023 operating expenses of $211.5 million. The $21 million increase was primarily driven by $2.7 million in higher water production costs due to an increase in wholesale rates and higher customer usage, a $3.2 million increase in depreciation and amortization due to new assets placed in service and $11.5 million in higher income taxes related to higher pretax earnings. In addition, net other income increased $3.8 million during the third quarter primarily due to an increase in unrealized gains on nonqualified benefit plan investments of $5 million. The impact of the Q3 2024 activity on diluted earnings per share is presented on Slide 6. The more significant growth drivers were rate and…

Thanks, Jim. On Slide 13, we discuss the 2024 general rate case I'm pleased to report that we continue to make progress with our 2024 general rate case filing. We've completed the initial prehearing conference and a judge and Commissioner have been assigned to our case. The assigned commissioner to the case is Commissioner Baker. We are pleased with this assigned given his past work at the California public advocates to educate [indiscernible] a negative customer impacts associated with rate case delays. As Jim mentioned earlier, we're proposing to invest $1.6 billion in our districts from 2025 to 2027, including approximately $1.3 billion of newly proposed capital investments to continue providing reliable, high-quality water service. This application includes our innovative low-use water equity program designed to decouple revenue from water sales while keeping rates affordable and reinforcing conservation goals. Our proposal includes rate increases to generate an additional $140.6 million for 2026, $74.2 million for 2027 and $83.6 million for 2028. We are now 4 months into the standard 18-month review process with the PUC and are actively responding to data requests. We've completed all our district tours and are preparing for public participation hearings later in the year. With that, I'll return the call back to Marty.

Greg, just out of curiosity, the volume of data requests kind of consistent with past rate cases.

Yes, just on the past rate.

Moving ahead, I'm on Slide 14. I want to take a moment to talk about our cost of capital for 2025. As many of you know, we have in California, what's called a cost of capital adjustment mechanism. Cost of capital adjustment mechanism basically tracks the utilities bond index from October 1 to September 30, the following year. In the event there's a 100 basis point change or greater the company can make apply for an adjustment to its ROE, both up and down. So I'm very happy to report that the period ended September 30, it was less than 100 basis point change and therefore, it locks in our ROE for 2025 at 10.27%, which we think is a very good ROE. Moving on to the next slide. Other regulatory mechanisms. There's a few things that happened in the quarter that I think are important. As I mentioned in my opening comments, we filed a number of advice letters for recovery that have been approved by the CPUC here in California. There's 3 primary filings emphasize. One is the [indiscernible] the incremental rates memo account, the 2023 MRAM balance and the 2023 incremental cost balance. The combination of those 3 things total approximately $94.2 million that we will be collecting over the next 3 years. For 2024, we expect to collect about $11.6 million from these balances as we move into the new year. Going on to Slide #16, I want to take a moment to talk about our environmental leadership and corporate recognition. First of all, I continue to be very proud of the recognition we received for our environmental stewardship and workplace excellence. The Alliance for Water Efficiency recently posted a study that highlighted the important impact of our conservation programs, which have reduced customer bills by…

[Operator Instructions]. And your first question comes from the line of Jonathan Reeder of Wells Fargo.

All today. Jonathan, on wanted to start out just to get your view on the CPUC's recent decision to hold the PD and [Calum's] rate case? I know the PDs language as pretty strongly against restoring pool decoupling. But do you think there are enough commissioners that are supportive of decoupling? Or might we just see some of the rationale language in that section revised?

Jonathan, this is Greg. And the kind of feeling of the industry right now is -- it was a strong sign that the PD was held almost a little over a month, maybe 2 months to the December meeting. But there is not a consensus on exactly what that could mean. That could potentially mean we are tightening up the language around disallowing it or going the other way and putting in the language that would allow it. It's just too soon to tell.

Okay. Fair enough. I can't tell either.

Jonathan, one thing I would add to that, and I haven't read the full decoupling application for any of our peer companies in California. But I do know in our application, we were keenly focused on 2 things that I think are on [indiscernible]. And I think this may be a strategy differential for us. One, we were very focused on conservation as we originally were when we originally decoupled back in the early 2012, I guess a couple -- that was number one. The other thing we focused on in our new rate design in our application was kind of underserved communities and having a rate design that helps low-income customers with kind of a lifeline rate that first year. So in our application, it wasn't just about conservation. It was also about low-income communities and making sure there's like a lifeline rate there that reduces customers on the lower term of the economic are the lower range of the economic spectrum. And we think that's going to be really, really important.

Yes. No. And that's where, I think, if it is even just softening the language in that BD, it kind of then opens the door to right. Some of these reimagined ways of, I guess, designing the decoupling where it really focuses on some of the goals you just mentioned, Marty.

Right, and I think what's important about the -- this community piece for the people on the lower economic scale is at sustained goal of the commission. It's -- they've made that very public. They're very interested in it. And I give the team here a lot of credit we took that to heart in the design of our decoupling mechanism that we filed for in our rate case.

Okay. Great. I look forward to that -- to see how that plays out. Also, I know the CPUC recently issued a decision lowering the energy utilities allowed ROEs by 42 basis points in 2025 by effectively reducing the magnitude of the 2024 cost of capital mechanism increase. Is there any avenue for the CPUC to do something similar for the waters for 2025?

I'll go first, Greg, and you can add a comment. I mean, I think that's always a possibility. Our ROEs have historically lagged the energy industries. So we're not coming off real high ROEs. In fact, I think our ROE at $10.27 is about where it was on the company back in 2006, and then it went down for a number of years, [indiscernible] went back up above 10% just recently. So I think that's a possibility. I think there's a number of factors going on in the electric industry. It's a little different than water. One, as you see, we have a growing appetite to get capital in the ground and we have to kind of step it up, getting that capital on the ground just to keep up with our current demands that we have in the existing rate case, which is great for stockholders. That means we're growing rate base and potentially future earnings for customers. I think the other thing, though, on the electric side is in California, you have a lot of wildfire costs that are being recovered in electrical rates, which have put multiple layers of rate increases on customers and I think there may be some pressure on the commission and just political pressure overall in California, given some of the incremental increases that were outside the general rate case that were added to electric bills. And so I don't think we know until we get there. But I think for us, we will most likely have to file a cost of capital application in 2025. It would be great if we can defer it again, but that -- I think that might be hard to do. and we'll do our best to defend the company's position on its ROE. Greg, anything you want to add on that?

The only thing else I would add is the -- unlike the water companies, the energies have an option to file an application to change their cost of capital in between their scheduled time. And they did that, I believe, in 2022 if there's an emergency, which was COVID. And so I think that might also be to why there's different treatment on the cost of capital between the 2 of us, energies as well water.

So obviously, Jonathan, this will be a hot topic for 25, and we'll provide updates on our cost of capital as we go through the process with the commission in 2025.

Yes. I think the takeaway, at least in the near term, is that for 2025, we have the 10.27% in terms as Marty mentioned, in terms of the recalculation this year at September 30, we didn't trigger any kind of movement from what we are currently experiencing in our ROE now. And I think we haven't had any pushback from the commission about the $10.27 how to break.

No, we made a filing to demonstrate just what Jim said and how we heard back from them.

Okay. So good. So it sounds like -- or the 10.27 is safe for 2025 and then [indiscernible] if there's -- I mean, I guess, would you be open to an extension that maybe include some sort of adjustment to the ROE maybe in exchange, you get some sort of multiyear extension in whatever that new ROE would be?

It's hard to speculate on something like that on the future. I will say, I have been a big supporter of the cost of capital adjustment mechanism because it does float up and down, and it's a 2-way mechanism. And again, our ROEs have lagged the electric industry, and we have a growing need to increase our capital investment. So I think -- obviously, we'd love to settle anything if we can because it's just a cleaner process that we can do it. But it's really hard to speculate because we don't have any facts and circumstances around it. And obviously, what we want to do is what's right for Cal Water, which is make sure we have an ROE that's appropriate enough that allows us to attract capital to allow us to continue our rate base growth. So I think we'll have a lot more certainty on it as we get into it, but it's really hard to speculate not being in a dialogue with the commission about it.

Sure. And then last on kind of the cost of capital. Slide 11 kind of indicates your authorized California capital structures, 60.8% equity. How does that reconcile with the 53.4% approved under the last cost of capital [indiscernible]?

No, that's our actual cap structure as of right now. So talk a little bit about ...

Yes. And again, Jonathan, that grew, right? So if you -- we are working to kind of manage that structure to mirror as close as possible or authorized amounts in other -- our operating utilities. I mentioned on the call, subsequent to the quarter end, we did a first mortgage bond in which we raised $125 million in debt financing. So we're starting to balance the debt and the equity. And really, it's -- to get it more in line with what our authorized amount is at the operating utilities to get that more in line with what we've got at group. And we'll kind of work through the capital structure at group to take the most optimal path to get that closer in line, but the first step was this $125 million that we issued subsequent to quarter end.

Okay. Great. I appreciate that clarity. And then last question for me. What are the potential impacts on the CapEx budget from the EPA's recently finalized lead and copper rule? Is that a major issue for your California service area?

It's really not. I mean, frankly, one of the nice things about being out on the West Coast is our infrastructure is newer than the East Coast. So based on what we've seen in all of our updated testing, we have one district that has hit that action level. But as we went in the testing in that district, our wells and our purchased water is spine, we think it's more associated with a couple of customers' homes. So I don't think it's that big of an impact for us, which, frankly, is nice because PFOS is the big [ kahuna ] for us the next 2 -- the next 3 years because that's an incremental $226 million we got to invest, and we want to be ahead of schedule on that. So I'm not losing too much sleep on the lead and copper role now [west].

[Operator Instructions] There are no questions at this. I will now turn the conference back over to Martin Kropelnicki, Chairman and CEO, for closing remarks.

Kathleen, thank you. Thanks for everyone for joining today. Please if you have questions, feel free to reach out to one of us and we'll answer the best that we can. Just closing, we closed the third quarter strong. We're going into the fourth quarter with a lot of momentum. But again, the overall goal going into the fourth quarter to just stay focused on the core business plan of the company and executing our existing strategy, and we look forward to giving everyone an update at the end of February when we announce our earnings results for 2024. So happy Halloween. Be safe, and we'll talk to everyone soon. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.