Angie Storozynski: Okay. I mean, you don’t have guidance. So that’s actually pretty important for us to have basis to extrapolate from, right. So again, we would probably appreciate it going forward. Secondly, on the PFAS spending, so will you be booking AFUDC earnings associated with this CapEx? So will it flow through the income statement?
Jim Lynch: Well, AFUDC is, we are eligible to use the AFUDC mechanism as we move forward with those expenditures. So I think 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.
Angie Storozynski: Okay. And then on, just in general on PFAS. So we’re starting to see some losses against investor owned utilities related to PFAS. The fact that you – or in general utilities were not attempting to remove the forever chemicals from distributed water in the past and I’m just wondering, how you can protect yourself? Is there anything in California that would allow you to limit the litigation risk and more importantly, limit any earnings impacts?
Marty Kropelnicki: Yes, I think from a liability standpoint in California, we have Hartwell, which basically – Hartwell decision, which basically says if we’re operating in accordance with the rules set forth by our regulator that we have protection. So I don’t – 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 associated with water, et cetera 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 group. So it will 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, will track the incremental costs 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 need to have. I was just disappointed in the commission’s decision not to recognize the capital now because the EPA has put 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 customers don’t want to hear, we’re going to implement PFAS treatment 4.5 years from now. If Jim’s drinking water that has PFAS in it, 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. And despite that, we reaffirmed our commitment getting that capital on 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’s safe for customers and implementing that capital as quickly as possible.
Jim Lynch: And then just one other point on that, Angie. We are pursuing any available grant we need [ph] that may be out there to assist with the whole PFAS issue, as well as potential third-party liability.
Marty Kropelnicki: Yes, there’s a lot of litigation around PFAS, actually, to the polluters, and there’s been a ton of press on that. I don’t want to get into 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.
Angie Storozynski: Okay. And then lastly, you mentioned the weak performance of water utility stocks and the timing of your future equity needs. I’m just wondering, either you raised your dividend by, I think, 7, 7%, 7 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 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 linked to?
Marty Kropelnicki: Sure. If you look at our dividend increases over the last five years, they’ve been above inflation. We have a payout ratio target between 55% and 65%. We try to manage within that range. I personally believe that a compound annual growth rate of dividends is one of the key drivers to equity valuation in the marketplace. So 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. Obviously, when the Board looks at that, we look at what’s 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 bare year for water utilities in 2023. But I think three most important things we can do, make sure water quality is the most important thing on our operating list, continue investing at that three times the 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, you create value for stockholders.
Angie Storozynski: Very good. Thank you.
Jim Lynch: Thanks.
Marty Kropelnicki: Thanks and have a good day.
Operator: It comes from Davis Sunderland from Baird. Your line is now open.
Davis Sunderland: Hey, Jim. Marty, Greg, good morning. Thanks for taking questions.
Marty Kropelnicki: Hey, Davis, good morning. Thanks for joining us.
Davis Sunderland: I want to ask you some questions, as relates to the business development plan; I guess real quick, is there any update on that that are noted. But specifically, has the [indiscernible] created any opportunity for you guys to be more aggressive or more interested or I guess take a closer look at any of the systems may have difficulty reaching them?
Marty Kropelnicki: Davis, we got about every third word there you were cutting out.
Jim Lynch: I think I’m going to answer a question that I think you asked, or at least I’ll rephrase the question 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?
Marty Kropelnicki: Wow. You could hear that in that question, that’s incredible, but let’s answer that.
Greg Milleman: Was that the right question, Davis?
Davis Sunderland: You got great ears, I apologize for that.
Greg Milleman: I think he said Jim had great ears.
Marty Kropelnicki: So let me answer that question. Yes, 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 slowdown on 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, the stuff we got going on in Texas and other things we’re doing in other states. So I think the PFAS thing, I think the smaller systems are a struggle to be in compliance. And you think about, for us, there’s 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.
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 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 [ph] or SJW or Middlesex, any of us that are publicly traded companies, you fall out of compliance and the regulator finds the hell out of you, or you end up getting sued by somebody, right, so we generally operate to the highest standards possible would be associated with that. 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 PFO and PFAS.
