California Water Service Group Q4 FY2024 Earnings Call

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

Thank you, Dustin. Welcome, everyone, to our fourth quarter 2024 results call for California Water Service Group. With me today is Martin Kropelnicki, our Chairman and CEO, and Greg Milleman, Vice President, Rates and Regulatory Affairs. Replay dial-in information for this call can be found in our quarterly results earnings release, which was issued earlier today. A replay of today's call will be available until March 31, 2025. As a reminder, before we begin, the company has a slide deck to accompany today's earnings call. The slide deck was furnished with an 8-K and is also available on the company's website at www.calwatergroup.com. Before looking at our fourth quarter 2024 results, I'd like to cover forward-looking statements. During our call, we may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties, and actual results could differ materially from the company's current expectations. As a result, we strongly advise all current shareholders and interested parties to carefully read the company's disclosures on risks and uncertainties found in our Form 10-K, Form 10-Q, press releases, and other reports filed with the Securities and Exchange Commission. And now I'll turn the call over to Marty.

Thank you, Jim. Good morning, everyone. I'm going to give you a brief overview before we jump into the details. And I'll just start off by saying what a difference a year makes. We started 2024 with a delayed 21 General Rate Case for California, and that was financially very challenging for the company. And now we end the year in an excellent financial position, setting new highs on certain critical business elements, including revenue, capital investment from our infrastructure improvement plans, rate base growth, and dividend growth. Adding our continued work on wildfire hardening, resiliency planning, sustainability, and our proactive approach to emergency preparedness and response planning, it really was a remarkable year. I think as we go through the results here today, you will agree that Cal Water accomplished a lot in 2024 under difficult circumstances. But by the end of the year, it has positioned us very well for continued success in 2025 and beyond. So Jim, with that, why don't we jump into the results for the year.

Great. As Marty mentioned, we did achieve strong financial results in 2024. We benefited from both new rates and the new rate structure that was authorized in our 2021 California General Rate Case. You may recall that the CPUC issued our 2021 GRC decision in March of 2024. As a result, we also benefited from 2023 interim rate relief when the decision was issued. Beyond the 2021 GRC, we benefited from a lower cost water supply mix due to higher precipitation in many of our California service areas over the past couple of years. Looking at Q4, these benefits were partially offset by lower water usage resulting from cooler, wetter weather in December 2024 compared to December 2023. Finally, I'll note that in the fourth quarter of 2023, we recognized a significant amount of revenue that was deferred under our water revenue adjustment mechanism, or WRAM, as well as benefits from the Tax Cuts and Jobs Act (TCJA) that did not recur in the fourth quarter of 2024. Our operating revenue for the quarter increased 3.6% to $222.2 million compared to the prior year Q4 operating revenue of $214.5 million. Net income for the quarter was $19.7 million, or $0.33 per diluted share, compared to $30.1 million, or $0.52 per diluted share in Q4 of 2023. Now I'll dive deeper into Q4 earnings as we look at the earnings bridge. As I noted, the increase in Q4 2024 revenue was driven primarily by $24.2 million, or $0.45 diluted earnings per share, increase in rates billed to customers as authorized in our regulatory filings and an increase of $5.5 million, or $0.10 per diluted share, in our Monterey Water Rate Adjustment Mechanism (M-WRAM) due to lower high-tier water sales. This was partially offset by lower unbilled revenue totaling $8.1 million, or $0.15 per diluted share, due to lower December water usage and $19.4 million, or $0.36 per share, related to previously deferred WRAM balances recognized in Q4 of 2023 that did not recur in 2024. Q4 2024 operating expenses were $189.9 million compared to $179.3 million in Q4 of 2023. This was an increase of $10.6 million. Following along on Slide 6, water production costs increased by $3.4 million, or $0.06 per diluted share, to $73.7 million, primarily due to an increase in wholesale rates and higher consumption. And the income tax benefit decreased by $9.9 million, or $0.13 per diluted share, to $3.9 million, primarily due to the timing of the annual TCJA tax benefit recognition. Turning to Slide 7, our full year 2024 results benefited from the same regulatory mechanisms as the quarterly results. Annual operating revenue increased to slightly more than $1 billion in 2024 compared to $794.6 million in 2023. Annual 2024 net income was $190.8 million, or $3.25 per diluted share, compared to annual 2023 net income of $51.9 million, or $0.91 per diluted share. This represents a $138.9 million, or 267.6%, increase in net income year-over-year. The 2024 revenue increase of $242.4 million was driven primarily by the cumulative impact of our 2021 California GRC decision, including 2023 interim rate relief and M-WRAM revenue totaling $123.9 million, or $1.73 diluted earnings per share. In addition, 2024 results benefited from $122.1 million, or $1.53 per diluted share, from higher rates and increased water consumption. Operating expenses in 2024 were $811.8 million compared to 2023 operating expenses of $717.5 million. Following along on Slide 8, this increase was primarily driven by higher water production costs of $22.2 million for $0.31 per diluted earnings per share due to an increase in wholesale water rates and increased water consumption. In addition, operating expenses were impacted by higher depreciation and amortization of $10.7 million, or $0.15 per diluted share, due to new utility plants placed in service. Finally, income taxes increased by $51 million, or $0.25 per diluted share, due primarily to higher pretax income. As a reminder, as a result of the Q1 2024 adoption of our 2021 California GRC decision, interim rate relief related to 2023 totaling $87.5 million of revenue and $64 million of net income was recorded in our 2024 operating results. This included $20.2 million of revenue and $13.6 million of net income that was attributable to the three months ending December 31, 2023. Turning to Slide 9, we continue to make significant investments in our water infrastructure to help ensure the delivery of safe and reliable water service. Company capital investments in 2024 totaled a record $471 million. This represents a 23% increase over our capital investments in 2023. As a reminder, our 2024 capital investments and our estimated capital investments for the period from 2025 through 2027 do not include $226 million of estimated PFAS projects scheduled for construction through 2027. In addition, for the period from 2025 through 2027, our estimate of capital expenditures is predicated partly on the outcome of our 2024 GRC in California and normal capital needs in our other subsidiaries. We expect our annual capital expenditures to increase during the next five years due to the continuing need to replace and maintain our water infrastructure. Turning to Slide 10, you can see the positive impact that our record level of capital investments is having on our regulated rate base. Our overall rate base grew to almost $2.4 billion for the year, an increase of 9.1% over 2023. If approved as requested, the 2024 California GRC and infrastructure improvement plan, coupled with the planned capital investments by our utilities and other states, would result in a compounded annual rate base growth of around 11.7%. This excludes the anticipated $226 million in PFAS capital investments, plus any recovery offsets that are planned through 2027. Moving to Slide 11, we continue to maintain a strong balance sheet, executing on several initiatives during 2024. In August, the CPUC issued a final decision granting Cal Water the authority to issue up to $1.3 billion in new debt and equity securities.

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

Thanks, Marty. Turning to Slide 14, I'm pleased to report that we continue to make progress with our 2024 General Rate Case. As a reminder, on our third-quarter call in October, we had completed the initial prehearing conference, and a judge and commissioner were assigned to our case. We are pleased with the assigned commissioner given his past work at the California Public Advocates to educate the CPUC on the negative customer impacts associated with rate case delays. Since then, the commission issued the scoping memo and ruling in November 2024. We completed public participation hearings across our service area, and importantly, we saw strong support for our infrastructure improvement plans during these events. We received the California Public Advocates report in late January. We are working with our teams internally to evaluate and respond in accordance with the California rate case plan schedule. Importantly, I would like to emphasize that this response was timely. To that point, given recent decisions issued by the CPUC and our current process, we are optimistic that we'll be receiving a decision on a reasonably timely basis and are pleased with the progression thus far. Before turning back to Marty, I just want to reiterate our proposal. We expect to invest $1.6 million in our districts from '25 to '27, including approximately $1.3 billion of newly proposed capital investments to continue providing reliable high-quality water service. Our application includes an innovative low water use equity program designed to decouple revenue from water sales while keeping rates affordable and reinforcing conservation goals. Our proposal includes rate increases to generate an additional $140.6 million for 2026, $74.2 million for 2027, and $83.6 million for 2028. We are now eight months into the standard 18-month review process with the CPUC. With that, I'll turn it back to you, Marty.

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

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

Great. I covered the dividends already, but if everyone can jump to Slide 15, I want to talk about our cost of capital and a couple of other regulatory updates that are going on. First, as Jim mentioned, we got approval to issue more debt and equity to finance our infrastructure improvement plans going into 2025 and beyond. I want to make sure we're clear. This doesn't mean we're going to rush out and raise $1 billion plus of debt and equity a day, but it does mean we have the ability to finance the capital program going forward and in the outbound years as we continue to make improvements to infrastructure. And I think that's incredibly important as we continue to deal with wildfire hardening, sustainability, and resiliency planning. A couple of other things that I think are important to note, as we announced in January, the CPUC granted our request to postpone our cost of capital filing for another year until May 1, 2026. This effectively maintains Cal Water's current capital structure through December 31, 2026, including the 10.27% current return on equity. Along with this decision, the CPUC also reauthorized the water cost of capital adjustment mechanism, which potentially adjusts the rate of return when the Moody's utility bond index fluctuates by more than 100 basis points. We appreciate the commission's flexibility on pushing this out one more year. Obviously, with the rate case underway, we felt that our resources were better focused on the rate case rather than doing a cost of capital filing at this time. On the right side of the page, we start talking a little bit more about other states. For those of you who have been with us for a while, we have continued to grow our investments in Washington, Hawaii, New Mexico, and now Texas. Internally, we've initiated a program to be more proactive in pursuing rate adjustments in our other states. All the states I mentioned are historic states, meaning we have to invest dollars, put the plant in service, start depreciating that plant, and then apply for rate relief. Our path forward on this or our strategy going forward is a dual strategy. One, the company wants to be more proactive in enabling us to recover our costs more timely, that is doing more timely rate filings. And two, by doing this, it provides for smaller incremental adjustments versus large, less frequent adjustments, which affect rates for customers. So we've hired a senior rates executive into that position, who now oversees the rates for all of our home states, which are really our subsidiary companies, and we've kicked that off, and it's off to a great start. While we're talking about the subsidiary companies, I want to take a moment to talk about our growth in Texas. As many of you know, we have been in the South Austin, North San Antonio market in that tech corridor. During 2025, we connected another 1,200 customers to our systems, which gives us a total customer account in excess of 4,200. That was up 39% year-over-year. In terms of committed connections, keep in mind this is kind of greenfield. These housing developments are rapidly being developed. We have what's called a committed connection. This is where developers put money in escrow to provide the funding to connect to our system. So during 2024, we added almost another 2,200 connections to the committed list, which means we have about 16,000 connections in escrow waiting to connect to our systems in that market. That continues to be the fastest-growing area of our subsidiary companies in the South Austin market so far, all of our work in that area has been on the wastewater side of the business. Turning to the next page, I want to take a moment to talk about our leadership in emergency preparedness and emergency response. For those of you that read our proxy, you know that one of our main goals, one of our top five main goals, is emergency preparedness and emergency response. More specifically, every year, we make it a goal, and provide high bonuses to that goal, to host a number of community emergency operations center (EOC) exercises. These programs allow multi-agency participation as well as utility first responders and community officials to hold drills to learn how to work together better in the event of a real disaster. These, obviously, with the wildfires that we had in Southern California and the ones we had in Hawaii, this is a very profitable program that yields very good results in case of a disaster. We remain dedicated to our community outreach and community EOC exercises that we are doing. In addition, as we mentioned on Slide 16, we've invested nearly $1 million over the last five years in supporting our fire agencies by helping them buy equipment that they may not have budgets for. During 2024, we donated another $175,000 to various agencies in California through our Firefighter Grant Program. As we move into the spring, we have a very proactive wildfire mitigation plan that includes vegetation management, infrastructure upgrades, and positioning our crews and backup equipment as we start moving into the fire months, which will most likely start as early as June this year. Of course, with regard to Southern California, I'm very happy to report that none of our systems were directly affected by the wildfires in Southern California, although we did have a number of employees who had to evacuate their homes. All of our employees were safe, and more importantly, none of our systems were affected by the fire. However, the fire scar is massive; there is a lot of work that needs to be done. Cal Water has contributed more than $100,000 to various local agencies that were on the front line providing relief, as well as doubled our employee match program, which allows our employees to make contributions to local charities that support people on the frontline. So, going into '25, you'll see us continue our leadership role in emergency preparedness and emergency response. We think that's one of the most important things we do as we deal with the climate change reality of the world we live in. So looking ahead to 2025, let's take a moment to talk about what to expect. First and foremost, as Greg and Jim both mentioned, it's the third year of our rate case for California, which is our largest subsidiary company. This is the year we tend to see the most amount of regulatory lag. We want to manage our controllable expenses tightly in the third year. Additionally, we want to do everything we can to keep the 2024 General Rate Case on schedule. The delayed 2021 Rate Case was very painful for the company, and I apologize that the financial results are very lumpy. We went from maybe $51 million one year to having this record, off-the-charts revenue this year. As Jim said, this is the recognition of the retroactive piece of the rates in California. We hope to avoid a similar situation with the 2024 rate case and bring that to conclusion by the end of this year. We also want to continue to evaluate strategic growth areas through targeted domestic M&A opportunities and continue our greenfield development in Texas, which is yielding very good results. Lastly, and probably most importantly, we want to continue to provide our best-in-class service for our customers as well as maintain water quality. There's a lot happening during 2025. Despite the lumpiness of the results, we achieved record revenue, record earnings on a normalized basis, record capital, and record dividend growth. We had no primary or secondary water quality violations, and our customer service scores were outstanding. So the company is positioned very well going into 2025, and I look forward to sharing the Q1 results with you in a couple of months. So Dustin, with that, why don't we open it up for questions, please?

And with the first question, we have Jonathan Reeder from Wells Fargo. Your line is open.

Hi, good morning, team. How are you all?

Good morning, Jonathan.

Hi Jonathan.

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

Greg, do you want to take that one first?

Yes, certainly, Jonathan. You've seen this before, so you know it's usually a significant margin where public advocates get involved. However, due to the recent activities of other water companies, I think we will have a chance to work through some of these issues and come to agreements on various matters. At the moment, we are still navigating our positions and preparing our rebuttal to strengthen our negotiation stance for those settlement discussions by presenting additional evidence. I'm optimistic that things could turn out positively.

Yes. And I'd just add to that, Jonathan, one of the pivots that companies made over the last 10 years is really taking a risk-based approach to our capital program. Obviously, the biggest part of our request to the commission is really the capital dollars that we need to continue making infrastructure improvement changes as we adapt to climate change and try to improve sustainability. Because that program is very risk-focused and detailed, we look for the highest rates of return that eliminate the highest amount of risk. Therefore, I think that actually helps us in these discussions. However, I think Greg is right; it will be a process. It will always be a good debate; I'm choosing my words carefully as we go into negotiations around these key things. But we’re very focused on risk mitigation and adapting for our future. And I think that's extremely important. So far, we are on track. We have the advocates' report, and we're going through it while working on our responses now. I've been very pleased with the assigned commissioner because every indication we've seen from them so far is to keep the GRC on course. The next big lift after we file our rebuttal is really getting into those settlement discussions, which will take place early in the summer months, and we'll see where we end up.

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

Actually, on the schedule right now, Jonathan, it's for April when we work in for settlement, and then hearings are scheduled for May.

Okay. And I mean, there's nothing that prevents you from reaching a settlement after the hearings if one isn't able to be reached beforehand, correct?

Correct. Correct. Yes.

Marty, or this is for Jim, is the roughly $85 million of equity issued in '24 under the ATM a good annual run rate to assume in the years ahead? Or how should we be thinking about annual equity needs to support the proposed 2025 to 2027 CapEx and rate base budget?

Yes, that's a great question, Jonathan. The current ATM expires in April, and we are currently evaluating the renewal of the program. As part of this evaluation, we are assessing what amount we will need to support our capital investments moving forward. As we go through the rate process, we will determine how much we need in relation to the shelf to support that program. I will say that we intend to raise equity only as necessary to maintain a stable capital structure at the group level, particularly in California and in our operating utilities. This is our primary focus moving forward. I'm hesitant to provide a specific number because our needs will be opportunistic based on our support for the CapEx plan and other capital initiatives, as well as how we are tracking relative to our capital structures.

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

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

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

Yes, I think that's fair. Again, I hesitate to put a number on it, but it is our objective to bring that, as you described it, over-equitization down to be more consistent with our operating companies and do that in the most efficient manner possible.

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

Yes, we do. If you recall, Jonathan, we put a press release out, I want to say it was 18 months ago, so technically two years ago, where we partnered with the Guadalupe Basin River Authority to extend their water pipeline into that South Austin market where there's no water. As that pipeline gets built, we anticipate that we will get into the water business in the South Austin market when that pipeline is completed. That's a public-private partnership involving a number of municipal players plus ourselves and the Guadalupe Basin River Authority. I'd have to go back and look at the project schedule; I believe it gets into 2026 now, at which point water is supposed to start being delivered in that South Austin market. So as soon as that happens, there's a significant amount of development happening in that region. If people haven't been out there, Jim and I, along with many others at Cal Water, grew up in Silicon Valley during the Silicon Valley boom, which was a remarkable time for all of us. The explosion of growth in that South Austin corridor is probably tenfold what was seen in Silicon Valley back in the '80s. For anyone who lived through that, it is just phenomenal how much growth is happening. I was out there at the end of January, and the plants we've put in have already connected hundreds of customers, and we're looking at expanding the plant due to the rapid growth. So yes, we will get into water in the South Austin market. We're investing in pipelines now to bring that water into the area while continuing to grow the wastewater business.

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

That's exactly what it is. This is really kind of greenfield development. We partnered with another company that specializes in it. They're very good at it, BVRT is their name. It's essentially greenfield development. And again, I'd encourage anyone interested to reach out to me, and I'd gladly take you out there to see it because driving through that corridor and witnessing the growth in both residential and commercial sectors is just mind-blowing.

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

I'm sorry, Jonathan, I missed the first part of your question. If you could just go back through that.

Yes. The release mentioned a $64 million net income, retroactive benefit from the delayed GRC decision recorded in Q1. But does that fully capture, I thought there was also an ICBA offset. That's how you got to roughly $1, whereas that $64 million implies something higher, more like $1.10?

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

Okay. So $1.10 is more accurate. So we should be thinking about the $2.25 - or sorry, the $3.25 less the $1.10?

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

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

Thanks, Jonathan.

Our next question comes from Davis Sunderland from Baird. Your line is open.

Good morning, guys. Congrats on a great update, and thank you for taking my questions.

Absolutely. How are you?

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

Yes. No, Davis, it's a great question. I just want to reference back to that rate base growth slide that Jim mentioned. Obviously, we're in a really, really good spot right now. We have almost a 12% growth rate on rate base. That does not include the capital investments we'll be making over the next three to four years on PFAS and PFOA. So from a growth perspective, a rate base growth perspective, we need to stay really focused internally on executing our plan because we're running at the fastest clip that Cal Water has been at since I've been here and I think the fastest it's been at since probably the 1980s. You had some boom during the Silicon Valley days in the late '70s. But right now, we're just in a great position. So for us to lose focus on the core business would have to be a really good opportunity now. Having said that, we're going to continue to look and be very strategic. We are interested in expanding our service territory, and we do have plenty of capacity on the balance sheet. But the primary growth engine of Cal Water has been and will continue to be that investment through our infrastructure improvement plans on our existing infrastructure, supplemented with strategic M&A in targeted markets. If opportunities arise that look like we can make money on and add value from both a customer and regulatory perspective, we’ll embrace them. However, if they are not profitable, have a poor regulatory market, or offer little room for expansion, we are less likely to pursue them. Shilen Patel does a fantastic job running our business development activities and collaborates with Shawn Bunting, our General Counsel, who also has extensive experience in utility M&A. We have a great team working in this area, but we will continue to be strategic in our focus and prioritize our rate base growth while assessing potential M&A opportunities.

And I think I'd just add one thing, Davis, in that regard. BVRT was a new platform for us. Texas is a new platform in a very strong market. The greenfield developments we are involved in down there are showing tremendous growth, as I mentioned. It’s everything we look for in an M&A activity or opportunity, all by being in that market. Although we've characterized it as greenfield development that we've been engaged in from day one, you can really look at it as us entering a new market with a great platform and significant growth opportunities. This checks a lot of the boxes we consider important in terms of M&A activity.

Yes, Davis, I mentioned I was in Texas at the end of January. We had an employee gathering, and some of their employees said, 'Oh, Marty, God, we feel a little bad that we only had almost a 17% growth rate year-over-year.' Because the growth from prior years was even bigger! I told them if we can maintain a 16% growth rate, I'd be very happy—I'd be the happiest CEO in the water industry. So let's keep that cadence going. We have all these developers' fees in escrow that we need to execute and connect the 15,000 to 16,000 customers. They have already paid their fees. Per our obligation, we need those systems ready to go and continue building out the system.

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

Yes, I'll start, and then I'll have Greg kind of jump in as well. One, it's a new water quality standard, right, that was set out by the EPA. So that's number one; it was new. Number two, we had to go out and survey all of our water sources. That seems like an easy concept on the front line, but we have over almost 1,200 wells that we need to test for PFOA and PFAS. We need to identify the wells, etc. So there was some uncertainty with how big the program had to be, and ultimately, you had some uncertainty coming from the EPA, such as when they were going to adopt the guidelines and how the state would handle them. In California, for example, the state provided us a memo account which is known, but uncertain regarding timing. So the capital cost and timeline are not quite known yet, and thus, it qualified for memo account treatment. We're fortunate to have a memo account in California, and the three states we have to deal with PFOA and PFAS are California, Washington, and New Mexico. Those are the areas where we are doing the most work. This will evolve, as we will run it as a corporate program, right? Because it is a new water quality initiative and standard. Our goal is to meet and exceed those water quality standards every day we operate. So that's why it's been excluded from the rate case because of the uncertainty of timing. We’re starting to hone in on what those capital estimates will look like. Greg, anything you want to add on that?

Actually, I was going to, but you wrapped it perfectly. It's really getting those estimates nailed down that was the direction we received from the commission.

Super helpful, guys. Thank you so much.

All right, Davis. Have a good day.

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

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

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