Julien Dumoulin-Smith: Got it. And just going back to lastly on that FMV piece, you guys commented extensible here, but just the time line on getting that clarity there. And you talked about being a little bit more protracted. Just how does this sort of at least from a process perspective, finally get to some resolution as far as you guys are concerned? And then prospects on expanding it even from there, given where we stand.
Susan Hardwick: Well, Julian, you’re going to have to help me. On the first part of your question, I’m not sure what you’re referring to.
Julien Dumoulin-Smith: Well, just on the fair market value just in terms of potentially taking a little bit longer yes, indeed.
Susan Hardwick: I got you. I just didn’t hear the first part. Yes, I think that, as I said in my remarks, and John expanded on a bit, I think that what the PUC has done in Pennsylvania is actually quite helpful. And I’ve got a lot of experience in the regulatory world over the last 40 years or so. I’ve seen many pieces of legislation enacted, and I’ve seen many situations where commissions have to work through the implementation of that legislation. And I think that’s exactly what we’re doing here. And as we said, we applaud the commission for taking this approach and really being thoughtful about it and understanding the importance of this legislation to the larger strategy in the Commonwealth. So I think the steps that are being taken make good sense.
Now having said that, we do have to continue to work through how those guidelines ultimately may be employed. But we think it’s just helpful. And we’ll give a framework for all of us to be able to work more productively in. Now having said that also, we do have to sort out what it means in terms of timing, and we’ve got a number of cases, acquisitions that we’re working on in Pennsylvania through the regulatory and approval process, and it’s obviously impacting that a bit currently, but we expect that to clear soon and be able to get back on our way here.
Operator: Next question Comes from Anthony Crowdell with Mizuho. Please go ahead.
Anthony Crowdell: Just a quick housekeeping question after Julien. You talked about the HOS note in the income, and you’re very clear about that, that’s more — or not much of an ongoing earnings number. I think you talked about maybe it rolls off in 2026. When we move forward post ’26, should we think about additional rate base that maybe backfills that on a more linear growth rate? Or — and I know $0.10 of a $5 in some number is very small, but just does something backfill that to keep their earnings trajectory pretty linear?
Susan Hardwick: Yes. I think you hit on it, Anthony, there at the end. It’s not terribly material. We think this is a great benefit from a cash flow perspective. The additional interest is nice to have. We think the certainty associated with that contingent payment we had on the New York contract extension is quite helpful now to have that secured. So we think there’s just a variety of things about the restructuring that made a lot of sense for us that don’t necessarily translate into any material impact to our overall plan. So long answer to your question, we would not expect there to be a need for finding additional capital to sort of fill in that very minor hole that this $0.10 will create.
Anthony Crowdell: Great. And just if I could squeeze one more. And it’s — it’s to Cheryl’s comments earlier and unfortunately, it looks like most of the Q&A has been sidetracked by Eversource question. So I’m not asking an Eversource question. Just when Cheryl talked about the increased needs on water systems, cybersecurity, you just think of that, is that maybe a foreshadow to that maybe the smaller bolt-on acquisitions may come at a greater frequency because of the requirements that are being — the compliance requirements that are being put on these smaller systems, was that where that was headed?
Susan Hardwick: Yes. I think this is an area we’ve tried to signal, I think, for the last several discussions we’ve been having, and I think really probably what prompted that even was PFAS as an example. We see that as just another area that may be difficult for some of these smaller systems to be able to manage, both from an investment standpoint as well as an expertise standpoint. Cyber is another great example. Interest rates is another great example. I mean, the list just gets longer, not shorter for these communities to sort of have to deal with. And from our perspective, we have always been very focused on trying to define what the need is for a community and helping satisfy those needs. And again, from an M&A perspective or an acquisition perspective, as that list gets longer, it creates more opportunity for us to have that dialogue and work with communities to solve those kinds of problems.
So yes, we think it does have upside to our acquisition strategy. It’s probably not a Tsunami though to use a water term. It’s probably a much sort of longer-term impact I think it takes a bit of time for communities to sort of wrestle with these issues and determine impacts to them before the ready to make a move. So again, we use these kinds of issues in our discussions. I think it will take some time before we see any measurable impact directly related to these issues.
Operator: The next question comes from Steve Fleishman with Wolfe Research. Please go ahead. Hi. Good morning. Good morning, Steve.
Steven Fleishman: Not an M&A question, so the — a couple of things on the HOS changes. So — just the — thinking about the shift in the interest rate on the note 7%, 10%, which is great; I mean that’s a pretty high rate to pay for the seller and I guess, I guess soon to get rid of the prepayment. And so I guess I’m just wondering how do I think about just making sure that, that seller in terms of getting paid back, getting paid.
Susan Hardwick: Great question, Steve. Yes. John, do you want to take this question?
John Griffith: Sure. From a credit perspective, we stay very close to the HOS business. We’re, in fact, a partner. And as lender, we’re constantly in touch with the business. The company has evolved, the credit has improved. Extending the New York contract is a significantly positive credit move and as I mentioned in my comments, the company is currently making an acquisition with new equity funding from their owners as well as cash on their balance sheet. So we do have covenants. They’ve remained in compliance with the covenants. And in fact, we’ve taken the opportunity to tighten covenants as well. But when you look at the underlying business, it’s frankly doing better than it ever has. So we feel very, very good about the underlying credit here.
Steven Fleishman: Okay. Does the owner, does the private — does the firm back it up to? Or is it just the business back up paying the rest?
John Griffith: Yes. No, the owner backs it up, and that’s what I was trying to say. So when there’s fresh equity coming into the business to make this acquisition, that’s coming from APAC who owns the business.
Steven Fleishman: Got it. And then just — I know you have that sharing mechanism, too for the business. Could you just maybe let us know kind of how much income you made on the sharing mechanism part in, let’s say, 2023 or 20 — Yes.
Susan Hardwick: Yes. Steve, I don’t know if we had that disclosed. Is it separate in the 10-K? Yes. Steve, we can point you to it. I’ll have Aaron follow back up with you to point you to it. But I think it is in the 10-K, which obviously, we filed last night. And this is the revenue-sharing mechanism you’re referring to, where we collect the share of the revenue that’s generated from the warranty work that they’re doing in our various state jurisdictions where we have contracts. Yes. So Aaron will redirect you to that.
Steven Fleishman: Last on the Pennsylvania case, I think two of the commissioners sent a letter at the beginning of the case, just kind of framing it. I’m not sure — is that abnormal would you say? Or is that normal for your Pennsylvania cases? How would you characterize that?
Susan Hardwick: Yes, I would say it’s probably not necessarily customary, but again, we think that this case is proceeding as it should. We don’t really see, again, any issues here. It’s a big case. I mean it’s $1 billion worth of investment and we were in just a little under two years ago on this case. So it’s certainly material. And again, solely driven by investment in the jurisdictions that we — or the communities that we serve there.
Operator: Next question comes from Jonathan Reeder with Wells Fargo. Please go ahead.
Jonathan Reeder: Hey, good morning, team. I just wanted to come back to EA and the fair market value stuff, do you anticipate that all the changes to the fair market value will come via the commission process? Or do you think some of the bills in the legislature will make it across the finish line?
Susan Hardwick: Yes. Our view is that this is the best path and the likely path to sort of resolve issues around fair market value in Pennsylvania. Again, I think this is normal practice. And I’m not speaking specific to Pennsylvania. I’m just saying normal in my 40 years of experience, this happens fairly regularly where commissions are charged with interpreting legislation and applying the provisions of it. And that’s what I think this commission is doing, and I think they took a very proactive step here to do exactly what you’re talking about to resolve the issues and be able to effectively implement the legislation. I think there’s no one — well, I shouldn’t say no one. There are a few probably that have conceptual problem with what fair market value legislation was intended to do.
I think there’s a good understanding of the need for consolidation in the state, and this is the mechanism to allow for that to occur. So I think it stands, and I think the commission will do the work necessary to make sure that the legislation is effectively enacted and implemented.
Jonathan Reeder: Yes. So I mean you’re saying PA is, in your opinion, very much fully behind continued promotion of consolidation.
Susan Hardwick: Yes. I think as a state, as a Commonwealth, I believe that is a true statement, yes.
Jonathan Reeder: Okay. what sort of impact do you think it will have on the deal activity? And would you say the proposed RRR will make it tougher for AWK to deliver on the M&A CapEx placeholders?
Susan Hardwick: I think we’ll have to see how it plays out and how ultimately it gets worked from a procedural standpoint. But I’d say, generally speaking, no. we do not see it having a material impact on available opportunities and then ultimately, the outcomes on transactions.
Jonathan Reeder: Okay. And then last question for me. I saw that in at least the PA and New Jersey rate case filings that revenue decoupling requests were made, possibly, it’s in the Illinois case, too. Do you typically make those decoupling requests and just don’t get them? Or is that something new that you’re pursuing?
Susan Hardwick: Yes, it’s a good question. I’d say it varies across jurisdictions. And again, part of our job here is to really understand what each commission is comfortable with and what mechanisms work or don’t work in a particular jurisdiction. And it’s also part of our responsibility to educate and to inform commissions and their staffs about how various mechanisms can work and what the impacts are. So we do that across our jurisdictions. And I think we have really been more proactive in that regard over the last couple of years. And so I think as we do that education and that dialogue it will inform where we propose what mechanisms. So I wouldn’t necessarily say it’s a broad application. The decoupling is always on our list. In every jurisdiction, I think it’s all circumstantial. What mechanisms work best in what jurisdictions and we work accordingly.
Jonathan Reeder: Okay. But for PA in New Jersey, are these new proposals? Or have they been there and, say, your most recent case, too?
Susan Hardwick: Yes. I’d have to go back and look to see if we had them specifically in those cases. I don’t actually recall. But again, I wouldn’t necessarily think this is breaking new ground on either of these proposals.
Operator: The next question comes from Gregg Orrill with UBS. Please go ahead.
Gregg Orrill: Yes. Thank you. Just a question on the PFAS settlements. Just sort of your expectation on the outcome following up on the 3M settlement there. And thanks for the additional updates. I’m just curious if anything’s changed around your view of the company’s sort of legacy liability to PFAS if there is one?
