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. After the speaker's remarks, there will be a question-and-answer session. And now I would like to turn the call over to Jim Lynch, Senior Vice President and Chief Financial Officer.

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. 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 are really five 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 will 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. Lastly, we will talk about our continued environmental leadership and corporate recognition as well as a few awards we won during the quarter. To start things off, let's have Jim Lynch take you through some of the financial analysis that highlights the quarterly results. Jim, back to you.

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. Recall that the MRAM is a rate adjustment mechanism that includes a tiered rate structure based on 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. Additionally, 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 usage increases contributing $0.56 and $0.13 per diluted share, respectively. Gains on nonqualified benefit plan investments contributed $0.09 per diluted share. These positive contributions were partially offset by the change in MRAM balance of $0.12 per diluted share and increases in water production, expenses, and depreciation and amortization expenses of $0.04 per diluted share, respectively. Year-to-date 2024 results benefited from the same regulatory mechanisms as the quarterly results. Year-to-date operating revenue increased $234.5 million to $814.6 million in 2024 compared to $580 million year-to-date in 2023. Year-to-date 2024 net income was $171.1 million or $2.93 diluted share compared to year-to-date net income in 2023 of $21 million or $0.38 per diluted share. The growth in revenue was primarily driven by cumulative rate increases, including 2024 rate relief of $95 million, 2023 interim rate relief from the 2021 GRC of $87.5 million and recognition of deferred RAM revenue of $15.6 million. Additionally, the change in our 2024 MRAM balance added $12.4 million and increased usage contributed $8.8 million. Year-to-date operating expenses were $621.8 million compared to year-to-date 2023 operating expenses of $538.2 million. The $83.6 million increase was primarily driven by an increase in water production cost of $15.4 million due to increases in wholesale water rates and higher usage. Water production costs increased an additional $3.3 million due to the incremental cost balancing account that was authorized in the 2021 GRC. We also recognized $13.1 million in deferred costs associated with the recognition of deferred RAM revenue and higher depreciation and amortization expense of $9.3 million. Furthermore, year-to-date income tax increased $41.1 million, primarily due to higher pretax earnings. The impact of year-to-date 2024 activity on diluted earnings per share is presented on Slide 8. The more significant earnings drivers include cumulative rate increases and recognized deferred RAM revenue of $1.29, $1.19, and $0.21 diluted earnings per share, respectively. The change in our 2024 MRAM balance and increased customer usage added another $0.17 and $0.12 diluted earnings per share, respectively. These increases were partially offset by higher water production expenses and recognition of MRAM related deferred water expenses of $0.25 and $0.18 diluted earnings per share, respectively, as well as higher depreciation and amortization of $0.13 diluted earnings per share. As a reminder, our 2021 GRC was adopted in Q1 2024 and included 2023 interim rate relief totaling $64 million. $15.2 million of the interim rate relief was attributed to Q3 2023 and $50.4 million would have been attributed to the 2023 nine-month period year-to-date. Turning to our capital, we continue to make significant investments in our water infrastructure to ensure the delivery of safe and reliable water service. Company capital investments during the nine-month period ended September 30, 2024, totaled $332.2 million, which is 86% of our $385 million 2024 capital base. As a reminder, our planned 2024 capital investments and our estimated capital investments for the period from 2025 through 2027 do not include $226 million of estimated PFOS projects that will be constructed over multiple years beginning in the fourth quarter of 2024. The positive impact of our capital investment program on the regulated rate base is presented on Slide #10. Our overall rate base is projected to grow to $2.36 billion by the end of 2024, which is an increase of 7.3% over 2023. If approved, as requested, the 2024 California GRC and infrastructure improvement plan, coupled with planned capital investments in our utilities and other states would result in a compounded annual rate base growth of 11.7%. Moving to Slide 11, we continue to maintain a strong balance sheet with a capital structure of 61% equity and 39% debt. During the quarter, the CPUC issued a final decision granting Cal Water the authority to issue up to $1.3 billion in new debt and equity securities to finance water system infrastructure investments from 2023 to 2027. We raised approximately $34.5 million during the quarter from the sale of 639,000 shares of common stock under our ATM program. Year-to-date, we've raised approximately $86.5 million from the sale of 390,000 shares under the ATM program. We have approximately $43.1 million remaining under the program that can be raised for general corporate purposes in the future, including planned capital investments and strategic opportunities. On the debt side, Cal Water completed the sale and issuance of $125 million of first mortgage bonds in a private placement that closed on October 22, 2024. The bonds bear interest at a rate of 5.22% and mature on October 22, 2054. Cal Water will use the bond proceeds to refinance certain existing borrowings on its short-term bank line of credit. Additionally, yesterday, our Board of Directors declared a $0.28 per share dividend for stockholders of record on November 11, 2024. This is our 319th consecutive quarterly dividend. Moving to Slide 12, we continue to maintain a strong liquidity position. As of September 30, 2024, the company had cash and cash equivalents of $105.2 million, of which $45.6 million was classified as restricted. Furthermore, we had additional short-term borrowing capacity on our lines of credit totaling $340 million. With that, I'll turn the call over to Greg to give an update on our 2024 general rate case and other regulatory matters.

Thanks, Jim. On Slide 13, I am 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 is Commissioner Baker. We are pleased with this assignment given his past work at the California public advocates to educate about 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 four 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.

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

Yes, it is consistent with past rate cases.

Moving ahead, 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. This mechanism basically tracks the utilities bond index from October 1 to September 30 of the following year. In the event there's a 100 basis point change or greater, the company can apply for an adjustment to its ROE, both up and down. So I'm very happy to report that the period ending September 30 saw a change of less than 100 basis points, which locks in our ROE for 2025 at 10.27%, which we think is a very good ROE. Moving on to the next slide, there are 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 are three primary filings to emphasize. One is the incremental rates memo account, the 2023 MRAM balance, and the 2023 incremental cost balance. The combination of those three things totals approximately $94.2 million that we will be collecting over the next three years. For 2024, we expect to collect about $11.6 million from these balances as we move into the new year.

On 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 approximately 21% over the last 15 years compared to projections with customers that did not have the same type of conservation program. We are very happy with the results of the survey and with what we've helped our customers achieve over the last 15 years. Additionally, the U.S. Environmental Protection Agency awarded California Water Service the WaterSense Excellence Award for the second consecutive year, recognizing the promotion of our water-efficient products within our conservation programs. The products we've implemented to date will save an additional 395 million gallons over the life of the devices. Furthermore, during the quarter, we were named one of the world's most trustworthy companies by Newsweek for the second consecutive year, placing us among only five water utilities recognized in the energy and utility category. Lastly, for the ninth consecutive year, we have been recognized as a great place to work, reflecting our ongoing commitment to creating an exceptional workplace environment and supporting our employees.

I think as many of you have probably heard me say, yes, we are a company of fixed assets, pipes and pumps, but our most important assets are our employees because they are the ones that make it all happen and interface with our customers. Lastly, I want to mention an announcement we filed during the quarter regarding the retirement of Ron Webb, our Vice President and Chief Human Resource Officer, who will retire on April 1, 2025. Ron has done an excellent job in HR and has been an outstanding colleague and friend, making countless contributions here at Cal Water. I want to take a moment to personally thank Ron and wish him all the best as he prepares for retirement. He will be dearly missed. As the CEO, one of your closest confidants is your HR executive, and Ron has been a fantastic partner in our journey. We have started a national search for his replacement, and I hope to announce his successor by year-end or early 2025. Looking at the quarter, I am very happy with our results. They were in line with our expectations, though a bit complex given the delayed 2021 general rate case. Moving forward, our strategy focuses on capital investments as announced in the press release. As Jim mentioned, we have invested a record amount of capital this year and enter the fourth quarter with strength in our infrastructure improvement plan. We will remain focused on customer service and servicing our customers as well as the 2024 general rate case. As Greg said, things are tracking according to plan, and we aim to conclude that rate case by the end of 2025 with new rates effective January 1, 2026. An additional point I'd like to highlight is that we have experienced a relatively light fire season this year in our service areas, with three major fires that were close to our jurisdiction causing no damage. I'm happy to report that we are also getting the first snowfall this week, which is a positive sign that winter is on the way and will help conclude the remaining weeks of fire season, typically running until the end of November. With that, Kathleen, we will open it up for questions, please.

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

Hello today. Jonathan, I wanted to start out just to get your view on the CPUC's recent decision to hold the proposed decision and Cal Water's rate case. The language appears relatively strong against restoring pool decoupling. But do you think there are enough commissioners that support decoupling? Or might we just see some of the rationale language in that section revised?

Jonathan, this is Greg. The general feeling in the industry is that it was a strong sign that the proposed decision was held for a month or two until the December meeting. However, there is no consensus on exactly what that could indicate. It may lead to tightening the language around disallowance or potentially opening the door to language that would allow it. It’s just too early to tell.

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. However, in our application, we were focused on two things that I think are important. Firstly, we prioritized conservation, as we did when we originally decoupled back in early 2012. Secondly, we addressed the needs of underserved communities, proposing a rate design that aids low-income customers with a lifeline rate. Our application is not just about conservation; it's about supporting low-income communities, and we believe that focus will be critical.

That's an interesting perspective. If even softening the language in the proposed decision could reopen discussions on reimagining decoupling to align with the goals you mentioned, I can see that being quite impactful.

Indeed, it's essential to emphasize the community aspect, especially for those at lower economic levels, since it aligns well with the commission’s established goals.

I understand. Furthermore, the CPUC recently decided to lower 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 chance the CPUC could take a similar approach for the waters in 2025?

I'll answer first, then Greg can provide input. I think that is always a possibility. Historically, our ROEs have lagged those of the energy sector, so we're not starting from a high base. Currently, our ROE of 10.27% is about where we were back in 2006 before a gradual decline. While I think a similar adjustment could be possible, it’s difficult to predict how factors in the electrical industry might influence our situation, especially considering recovery costs associated with wildfires that may pressure the commission amidst rising rates. We will likely need to file a cost of capital application in 2025 and will aim to advocate strongly for the company’s position on ROE.

I would add that utilities in the energy sector have more flexibility to file applications to change their cost of capital when necessary, which partly explains why we are seeing different treatment between the two sectors.

So Jonathan, this is a hot topic for 2025, and we will provide updates regarding our cost of capital as we proceed with the commission.

Yes, the key takeaway for the near term is that for 2025, we have secured our ROE at 10.27%, as Marty mentioned. The recent recalculation at September 30 did not trigger any changes.

To clarify, we made a filing to confirm what Jim just stated, and we have not encountered any pushback from the commission about the 10.27%.

That’s good news. It sounds like 10.27% is secure for 2025. Would the company entertain an extension that might involve a slightly adjusted ROE in exchange for multiyear guarantees?

It's challenging to speculate on future outcomes, but I support the cost of capital adjustment mechanism because it allows adjustments up and down. Our ROEs have lagged those of the electric industry, and we have a growing need to increase our capital investments, which would be favorable for shareholders. That said, we'd prefer to reach some kind of settlement rather than prolonging negotiations. However, without any facts and circumstances to guide discussions with the commission, it's difficult to predict.

Great, thank you for the clarity on that just one last thing. Slide 11 indicates your authorized California capital structure is 60.8% equity. How does that reconcile with the 53.4% approved under the last cost of capital application?

No, that's our actual capital structure as of right now. So to explain further...

Yes, Jonathan, that has grown accordingly. We are managing that structure to align closely with authorized amounts at our operating utilities. As I mentioned, following the quarter end, we successfully executed a first mortgage bond raising $125 million in debt financing. We are aiming to balance our debt and equity structures to bring them in line with what we've authorized.

Thank you for that clarity, and last question: How might the recent finalized lead and copper rule from the EPA impact your CapEx budget? Is that a significant concern for your California service area?

Not really. One advantage of being on the West Coast is that our infrastructure is newer compared to the East Coast. Based on updated testing, we found only one district hitting the action level, which seems associated more with a few customer homes rather than our wells or purchased water. Hence, this shouldn't impact us significantly. However, PFOS remains a major concern, necessitating an incremental $226 million investment over the next few years, and we'd like to stay ahead of schedule on that front.

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

Thank you, Kathleen. Thanks to everyone for joining today. If you have questions, feel free to reach out to one of us, and we'll answer them to the best of our ability. In closing, we had a strong third quarter, and we are entering the fourth quarter with significant momentum. Our main goal is to stay focused on our core business plan and execute our existing strategy. We look forward to updating everyone at the end of February when we announce our earnings results for 2024. Happy Halloween, and stay safe. We'll talk soon. Thank you.

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