Q1 2020 Earnings Call

May 5, 2020

[music].

Ladies and gentlemen, thank you for standing by and welcome to be S. T. W. Groups first quarter 2020 financial results Conference call. At this time, all participants are they listen only mode. After the speaker presentation, there will be a question and answer session to ask.

A question. During this session you would need to press star one on your telephone. Please be advised that today's conference is being recorded it will require any further assistance. Please press star zero I would now like to have the conference over to your speaker for today Mr., Jim Lynch Chief Financial Officer. Thank you. Please go ahead.

Thank you operator.

Welcome to the first quarter 2020 financial results conference call for STW Group I.

I will be presenting today with Eric Thornburg Chairman of the board President and Chief Executive Officer.

For those who would like to follow along slides accompanying our remarks are available on our website at www Dot STW group Dot com.

Before we begin todays presentation I would like to remind you that this presentation and related materials posted on our website may contain forward looking statements.

These statements are based on estimates and assumptions made by the company in light of its experience historical trends current conditions and expected future developments as well as other factors that the company believes are appropriate under the circumstances.

Many factors could cause the company's actual results and performance the differ materially from those expressed or implied by the forward looking statements.

For a description of some of these factors that could cause actual results to be different from statements. In this presentation. We refer you to the financial results press release and to our most recent forms 10-K, 10-Q, and 8-K filed with the Securities and Exchange Commission copies of which may be obtained on our website.

All forward looking statements are made as of today and STW group disclaims any duty to update or revise such statements you.

You will have an opportunity to ask questions at the end of the presentation.

As a reminder, this webcast is being recorded an archive of the wet and an archive of the web cast will be available until July 27 2020.

You can access the press release and the web site the webcast at our corporate web site.

I will now turn the call over to Eric.

Thank you Jim.

Welcome everyone and thank you for joining us finer thornburg and that is my honor to serve as chairman President and CEO of SGW group.

I would like to start by thanking all of our nation's essential workers, who are bravely serving us on the trunk lines. During this extraordinary time.

Public safety employees, consisting of police fire <unk> emergency response, and health care professionals, all deserve our recognition and appreciation for their dedicated service.

In addition, we should not forget about those working in our grocery stores and other critical supply chain employees, who are potentially risking their personal safety to deliver he central services.

That's JW group and its subsidiaries are keenly aware of and readily accept our public health responsibility to protect our employees customers and communities during the scope at 19 crisis.

We have over 700 passionate and dedicated water professionals, who are unified and their shared commitment to deliver on our public health mission. During this pandemic the continued delivery of safe and reliable water service I'm incredibly proud and honored to serve alongside all 726.

Six of them.

Our response throughout this event.

Has been and will be guided by this fundamental principle.

Checked our people.

Protect public health and protect our brand doing what is right and it harmony with our core values integrity respect service compassion trust transparency and teamwork.

Our number one priority as we responded continues to be the health and safety of our employees.

As we carry out our critical role in delivering life sustaining safe water service.

We limited our teams work to mission critical activities, such as conducting emergency repairs.

Water quality monitoring and operating our water treatment facilities under additional safety guidelines recommended by the centers for disease control, our local health departments, and our company health and safety experts.

As additional guidance becomes available from state officials and health agencies were evaluating additional functions, including delivery of our capital projects to determine when those maybe safely resumed.

Our responsibility to protect public health. During this crisis is clear and we will continue to monitor developments and respond as necessary through our national as well as local emergency operation centers to protect our employees our customers and communities.

Earlier this year, we provided earnings guidance for the first time in our history as a public company.

We did so in order to provide investors with a clear sense of the underlying strengths of our company, having just completed a transformative combination with CTW S.

Worldwide events, we've experienced thing since then could not have been unforeseen at the time the guidance was given.

There is much we do not yet fully know in regards to depend dentek and its possible longer term impacts on our nations economy.

Rather I thought I could candidly outline the sensitivities, we see in regards to the possible impacts from Kogan 19, as well as weather related challenges on the guidance. We previously provided for 2020.

The current global covert 19 pandemic is affecting our national and local economies due to mandatory orders limiting business as social activities to help protect public safety.

To the extent business customers in our service communities are closed or residential customers experienced a loss of income during this event it may affect water usage.

Customer's ability to make timely payments for water service and ultimately our operating revenues.

At the same time state regulators have mandated customer protections, including a moratorium on shut off for non payment and waiver of certain late payment fees that may affect our cash flow.

However, our regulators also recognize the critical role our water utilities play and that our companies will incur additional operating expenses related to covert 19.

From remote work arrangements additional equipment goods and services necessary to maintain the safety of our people and facilities.

Anticipated increases in uncollectible accounts and the pause in construction work, we anticipate covert 19 will negatively impact our 2020 business plan and financial performance.

With the exception of Maine, all of our operating subsidiaries had been provided regulatory tools to deal with the Pandemics financial impacts.

San Jose water has activated it's catastrophic event memorandum account to track incremental costs, such as bad debt waved connection fees and deposits.

And usage declines from authorized levels.

Connecticut water has a water revenue adjustment mechanism to allow recovery of authorized revenues for water usage and has established a regulatory asset account to track costs incurred and revenues lost as a result of coated 19 related regulatory orders.

As JW a T X establish a regulatory asset account to track expenses, including non payment and late fees.

And I'm also confident that the main public utilities Commission will be fair and reasonable in evaluating the impact on our operations there.

Through the end of Q1, despite thousands of close businesses, we have not yet seen a material financial impact from coded 19 related events on SGW group.

We continue to closely track our operating results and are working with our peers and local and national industry associations to raise attention to the industry impacts and advocate for further regulatory relief.

Yeah, that's still there's much we do not know.

We do know that every $1 million of increased columnist for whatever reason would have an earnings impact of three and a half cents per share.

These variables certainly present challenges.

However, as we are now part of a larger combined organization. We have the added benefit of weather economic and regulatory diversity that comes from operating enforced states to help mitigate some of the risks.

Where there is a greater clarity is with our water supplies in California.

With the rainfall season, largely behind us and because of the lower than normal precipitation experience locally and thereby impacting available surface water supplies in our watershed.

We anticipate significant increases in our operating costs through the reliance on purchased water from our wholesaler to meet our customers' needs in 2020.

Every billion gallons of purchased water has an incremental cost of $4.2 million more than using our own supply sources.

Has a direct result of the water supply outlook and in full transparency. We are revising the previously announced guidance of 225 to $2.35 per share to $1.95 cents to $2.05 per share in 2020.

This graph shows how impactful the weather has been on our 2020 surface water supply as compared to 2019.

With no further significant precipitation anticipated in Q2.

We expect a 30 cents reduction to earnings per share and have revised our guidance accordingly.

On a positive note. This graph shows our California demand ahead of last year and ahead of the five year average.

This bodes well as we head into a peak usage months ahead.

Any further revision to this guidance as a result of the pandemic will be communicated in the normal course of our disclosure.

Given that we're only six weeks into this shelter in place way of life.

It is difficult at this juncture to fully quantify the financial impacts of coded 19.

Well, we can say is that we have high quality water systems throughout our service areas and our investing in them to benefit customers communities and shareholders.

The prudent management of our business and financial resources continues to be fundamental to our growth.

And our ability to return capital to shareholders.

We are proud to have continuously paid a dividend for over 76 years and to have increased that annual dividend in each of the last 53 years delivering value to our shareholders.

I will now turn the call over to Jim who who will review our Q1 financial results.

After Jim's remarks, I will address regulatory and other business matters Jim.

Thank you Eric.

Our operating results reflect the first full quarter of combined operations with Connecticut water service anchor Cws.

An increasing customer usage and new revenues authorized in our California, 2019 general rate case.

In addition, as Eric mentioned, we experienced a decrease in the availability of surface water supplies due to dry weather conditions in our California service area.

The impact of Covet 19 was not significant to first quarter operating results that could have a greater impact during the remainder the year.

First quarter revenue was $115.8 million or at 49% increase over the first quarter of 2019.

Net income for the quarter was 2.4 million or eight cents per diluted share.

This compares with 5.9 million or 21 cents diluted earnings per share for the first quarter of 2019.

Diluted earnings per share reflects the change in our earnings pattern that resulted from the CTW us transaction.

Interest on debt and the impact of new shares issued to finance the transaction is recognized evenly throughout the year.

On the other hand earnings from Connecticut, and main will principally follow a seasonal pattern.

As a result, as we move forward, we expect to see lower earnings during the fall and winter months when cooler temperatures and increased rainfall typically occurs and higher earnings in the spring and summer months, when warmer dry weather and higher seasonal demands typically occur.

The change in diluted earnings per share for the quarter was primarily attributable to an increase in customer usage in California, and Texas of 18 cents per share.

CTW us results, a 15 cents per share.

Rate increases in California, and Texas of nine cents per share.

And the savings in merger related costs seven cents per share.

These increases were offset by interest expense on new long term debt of 22 cents per share.

A decrease in California surface water production of 16 cents per share.

Increased production costs due to higher customer usage in California, and Texas, a 16 cents per share.

And an increase in California, and Texas General and administrative expenses of eight cents per share.

In addition in 2019 five cents per share of interest income was earned on invested proceeds from our December 2018 equity offering.

Similar income was earned in 2020.

The revenue increase was the result of $27.4 million and new revenue as a result of the CTW us merger.

$6 million in higher customer usage, and 3.5 million and cumulative rate increases primarily the result of the 2.2 thousand 8%.

California General rate case increase implemented on January Onest of 2020.

In addition, we experienced a 1.1 million dollar increase related to net changes in our California balancing and memorandum accounts.

Total 2021st quarter water production costs were 26% higher than the first quarter of 2019.

The higher water production expenses were primarily due to $6.3 million and new CTW us expenses.

$5.4 million from a decrease in the amount of lower surface lower costs surface water produced in our northern California watershed.

And 5.3 million in higher customer usage.

Along with 1.5 million and higher per unit cost for purchased water groundwater and power.

These increases were partially offset by 1.5 million dollar decrease in California is cost recovery balancing and memorandum accounts.

Heading into 2020, we anticipated producing approximately 3.5 billion gallons of surface water from our northern California watershed, which is representative of our 10 year average surface water production.

However, through the first 2021st quarter when the majority of watershed precipitation occurs we experienced the second lowest rainfall level since 2011.

Absent additional rainfall, we anticipate 2020 surface water production will be between 1 billion and 1.2 billion gallons.

While we believe existing treated and groundwater supplies in our California service territory are sufficient to meet 2020 customer demand.

The incremental cost to replace the surface water with purchase imported ore groundwater, it's approximately 4.2 million per billion gallons.

Other operating expenses increased $18 million or 28%.

For the quarter, primarily due to 9.2 million in higher general and administrative expenses, including $6.4 million in new CTW us general and administrative expenses.

Other first quarter expense changes included $6.2 million in higher depreciation related to utility plant additions.

3.3 million and higher property and other non income taxes.

And 1.8 million in higher maintenance expenses.

The increases were primarily result of the inclusion of CTW us first quarter activities.

Finally merger related expenses decreased by 2.2 million quarter over quarter.

Other income and expense in 2020 included $4.1 million and interest expense on SGW groups Senior notes issued in October of 2019.

And 858000 of interest expense from San Jose water is $80 million senior notes issued in March of 2019.

In addition in 2019, we recorded $1.8 million of interest income on invested equity proceeds and again no. Similar income was earned in 2020.

Turning to our capital expenditure program, we added $38.3 million and company funded utility plant during the quarter.

This represents 17% of our total 2020 planned capital expenditures.

From a financing perspective first quarter 2020 cash flows from operations decreased 49% for the first quarter of 2019.

This change was primarily the result of a $13.1 million decrease in the collection of balancing and memorandum accounts and a 9.2 million dollar increase in payments of amounts previously invoiced in accrued partially offset by a 5.1 million dollar increase in interest accruals for new debt.

Issued and debt acquired in the merger with CTW Us and a 4.9 million dollar increase in net income adjusted for noncash items.

In March 2020, Connecticut water company issued $35 million in unsecured senior notes with a 30 year life at 3.51%.

Proceeds from the note issuance, we're used to refinance outstanding balances on the Connecticut Water Company Bank line of credit.

At the end of the first quarter, we had $103.6 million available on our bank credit lines for short term financing of utility plant additions and operating activities.

The average borrowing rate on the line of credit advances during the quarter was 2.91%.

With that I will stop and turn the call back over to Eric.

Thank you Jim.

Well there are clearly challenges, resulting from a pandemic that is affecting all businesses STW group continues to execute on our core growth strategy of investing in high quality water systems to provide safe and reliable water service to customers and communities and earning a fair return on those investments.

Our capital programs continue to be the Companys earnings engine heading rate base, and ensuring resilient water systems.

We are complying with the shelter in place orders and moratoriums on business activities.

And have temporarily paused start construction programs in all states, except Texas.

We're now evaluating when and how those may resume to deliver that work in 2020.

In California, we still anticipate completing the $320 million in investments authorized and our current general rate case decision by the end of 2020.

We're currently ahead of schedule owing to the advanced performance of construction projects in 2018, 2019, and the first two and a half months of 2020.

In Connecticut in Maine, we anticipate minor impacts as the construction season does not fully get underway until April or may due to weather.

In Texas business continues as usual there is no moratorium on construction activities.

Future capital improvements will be proposed in several important upcoming regulatory filings planned across our states, including Connecticut waters first general rate case since 2010.

Main waters, Camden Rockport divisions general rate case.

And San Jose Waters General rate case for new rates and 2022 through 2024.

Other regulatory developments in Q1 include the approval of Connecticut waters with that charge effective April 1st 2020, resulting in incremental annual revenue of $2.2 million.

The conclusion of the California, Pcs review of San Jose Waters pass billing practice for service charge changes.

The company is currently providing refunds to customers totaling approximately $2.1 million.

San Jose water is also planning for $5 million, a new capital investments and towards water system in accordance with the settlement agreement.

And on order correcting an error on San Jose Waters current GRC decision was received allowing the company to file for the recovery of $1.2 million balance and its pressure, reducing valve modernization and energy recovery memorandum account.

A final decision on the recovery is anticipated in Q3.

As Jim mentioned, we're very closely tracking revenue impacts, resulting from the pandemic and adjusting our business operations to mitigate the.

A key metric will be any difference between actual versus authorize usage and we're monitoring both residential and business usage.

While it is too early to determine the full usage impact.

Connecticut water has the protection of the statutory water revenue adjustment mechanism.

And for main water and SJ W. TX the revenue mix enjoyed by these companies of approximately 80% to 85% residential and public fire and 15% to 20% for business provides strong revenue protection.

And while San Jose water is revenue mix is approximately 60% residential and 40% business.

It's Q1 actual usage is tracking quite nicely with authorize usage I.

I would also point out the apartment complexes are part of the business revenue class. So that may well provide a hedge here as people work from home during this challenge.

Furthermore, San Jose waters current GRC decision allowed for greater cost recovery from the fixed charge, allowing higher revenue stability overall.

And the 153 year history of our company and its people we have endured many natural disasters droughts floods tornadoes hurricanes ice storms extended power losses fires and earthquakes and we have served our customers in communities throughout time so crisis.

Including economic hardships terrorist attacks and even wars, all incredibly difficult challenges that we have met head on and overcome.

Looking ahead, we are preparing for I returned to full operations in the next few months.

This includes evaluating our capital projects mix and coordinating with our construction partners to quickly ramp up construction activities once clearance has provided.

We are also developing a risk based process.

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Whatever the new normal may look like our goal remains the same.

And deliver on our public health mission as a water service provider and protect our employees customers and communities.

Credibly proud of all of our employee teams and their commitment to serving our customers in communities and Im confident that we will emerge from this crisis with stronger and more resilient company at every level within the organization.

I wanted to sincerely. Thank the board of directors for your leadership and support we truly have an outstanding board, where the diverse array of talent experienced technical knowledge wisdom and even geography.

That will serve stockholders customers and employees alike.

They have exemplified the values of our organization and provided the right balance of support and challenge to our leadership team.

Key additions to the board include Carol Wallace, Heather Hunt and Marianne handily Tvs JW group board, having been elected by stockholders in 2020.

All three of served on the board since October 2019, with the close of our historic combination with Cws and have been fantastic Board additions.

Finally, I would like to thank Doug team for his service to the company.

Doug has served as director of the company since 2003.

Doug is a brilliant individual and his contribution to our company and stockholders is hard to measure.

He is a key part of our history carrying the audit committee for many years, we wish him the very best and with that I would like to turn call back to the operator for questions.

Ladies and gentlemen at this time, if you would like to ask a question. Please press star one on your telephone to withdraw your question. Please press the pound key please standby we've compiled the Q day roster.

You have a question frozen line up how sign Doza with Wham.

Hi, good morning.

One of them owns all grown pulls inclusions long Walpole hospital.

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Equals old will all quantifying some of the cost all earnings was very helpful algae blooms and legal costs about two cents earnings.

Hi, closeness you can see you soon.

Well able school squabbles, those small memo account will see momentum homes. When you have incremental chemical costs, while small will evolve memo account are you able to defer those costs from hitting the pool.

I think we'll hold it will.

Jim would you like to answer that question.

Sure sure and thanks to the question is on right now it is a tracking mechanism and the way that the tracking mechanism works is we capture the cost that are directly related to go midnight 19.

As well as a quantifiable revenue impacts.

And then at a point in the future.

We would submit the the balance that has been tracked within the account to the commission and I'm speaking, specifically about California, the process, maybe a bit different and Connecticut in Maine.

In Texas, but generally speaking it would follow the same sort of have authorization procedure, where a review would be done on that.

The cost.

They would not be recognized by the company in terms of deferral.

At the time that they are incurred simply because.

The memorandum account is subject to further review by the.

Regulatory authorities prior to our authorization to put them into rates.

Okay, that's lump all of whom into homes up the whole hudsons long hauls Oswald idled, what does the Paul slows the little mum on thinking on a host of Middle East Alton you see on the recovery of the whole, let's just call any business hop on.

On the timing principal maybe approval, Oklahoma, whom call on the homes on all posted some home.

Jim why don't I start with that and then maybe you can supplement to the supplement my answer there.

Thanks as on Yeah. Appreciate your question and when you look around California, some of the other class a utilities.

As a modified.

Balancing account memorandum for for purchased water, both price and quantity, but it's connected directly to a revenue adjustment mechanism, we're evaluating and we've applied in the past for revenue adjustment mechanism and we're not successful and receiving that so what we.

We'll do is look at this very carefully and look at history and in our next general rate filing.

You know make the determination as to whether we ought to apply for a water supply cost.

Balancing account that would include quantity and not just price and.

As our current thinking is the that's attractive to us because it kind of de risks on the downside.

But on the other side, you know would flow back to customers. If we had a whole lot of water that we can treat ourselves. So we think that would work for customers quite well, but we want to make sure we get it right and and I wouldn't say of course. This is really a unique a year and.

And that the magnitude of it.

It was quite significant and if you look back in the past we've we've not had gaps of this nature here for some time, so so Jim a anything I missed or you want to expand on.

No I think that bet.

To.

That is the answer effectively.

Right now anything above what is included in rates is enjoyed by the shareholders, but when we don't when we don't produce.

The amount that is included in rates that's borne by the shareholders.

So there is an element of risk associated with the current construct and as Eric mentioned. This is one of the in the last 10 years one of the Darius.

Periods of time, we've experienced up up in the.

The Northern California watershed, followed it follows however, last year, which was one of the.

One of the higher rainfall.

Totals that we've experienced in that same watershed so.

You know, there's there was benefit shareholder benefit in the prior year and and.

This year because of the lower rain.

That is going to be something that fit the shareholders ultimately have to bear.

He has a question for the line of Durgesh Chopra with Evercore ISI.

Hey, good morning, guys. Thank you for taking my question.

I apologize I actually jointly but can you provide.

Any color or quantifiable demand trends in your jurisdictions in California, Connecticut etcetera.

Yeah, we can Douglas thanks for thanks for participating recalled today and your question and we did have a graph up there and I'm not sure.

John Tang can go back to that graph, but it shows kind of how we're tracking currently against the five year average and we shared that.

Right now through April at least our our system delivery or demand from our customers in California is about 13% ahead of the five year average and I'm. So what we said was that we had not seen a.

And a revenue impact in the first quarter and that we were monitoring very carefully going forward and I mentioned that and though we have 60% of our revenue in California comes from residential customers and 40% from our business customers.

But that the apartment complexes and condominium complexes in San Jose are classified as business.

In our revenue account. So so there may actually be some hedge there.

But we do have thousands of businesses that are of course close like all communities and so that's why we're watching it very very closely Tim anything that I missed.

Yes, the only thing I'd add Eric is in Connecticut, We do have a decoupling.

Mechanism, Iran. If you will and bad debt that provides.

Downside protection in the event that we do see a decline in demand so between the two service between the two largest service areas.

We're continuing to monitor the activity and a in ER and are confident and comfortable with where we are at this point [noise].

I guess.

I appreciate the year to date, specifically related to April or the demand trends.

I would you know are they similar to the year to date trends are you seeing.

Sort of some sort of moderation in demand in the month of April I don't know if you can comment on that or not.

Jim a that graph that we put up I think.

If you look at it would be fair to say it fits with widening away from the five year average the further along we got into the April end period there.

I would caution.

You know how we look at that because you know it is so early in this and this event and of course, whether in irrigation.

Drives that so.

So that may as well account for a portion of that but but at this point, what we have not seen any decline or deterioration in and waters and water demand in our customers in California, particularly.

Got it. Thank you Super helpful. And then maybe just a quick follow up on the on the guidance.

Eric to the guidance is has that slowly so leaving adjusted for the purchase water expense is that the sole change between the on the guidance provided the beginning of the air and worsened now the reason why ask is a lot of your peers on electric gas.

Utility side of things I've talked to out.

Material on M. savings is as folks work remotely and and the in terms of mileage reimbursements and just travel costs and things like that so I'm I'm kind of curious if the guidance you may be able to offset some of you know the pressure from purchase water costs from these savings.

Thanks Turkish ship the the adjustment is is completely driven by the change and the.

Sources of the water for customers. So all of that's driven by having to purchase additional water.

So we're having through the first quarter you know.

Jim reported our our revenues and expenses and but we haven't had a close yet in April and so we'll be doing that and we'll have to be able to judge if there any savings benefits from.

From the current posture.

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But we also have to track of course on collectibles and other expenses related to it so you.

You know net Natco, we'll have to be watchful to see if there's any impact if if there is a beneficial impact. Yes. You know then we could apply that towards the challenge that we have on the on water supply or other challenges that arise during the year, but right now they complete.

Modification to our guidance is based on the changing profile and our water supply.

Got it. Thank you so much appreciate the detail.

Thank you Doug I really appreciate your question.

Once again, if you have a question. Please press star one on your telephone keypad.

Your next question comes from the line of Jonathan Reeder with Wells Fargo.

Hey, good morning, Eric and Jim.

Little confused are you a firming your 2020 Capex budget in like 225 million I do you expect to make that up in particular in California, the remainder of the year or does the pause in activity.

Is that going to cause you to come up short.

Thanks, Jonathan for question texture for been here today, and so I'll start and then have Jim.

Make any additional comments that are necessary.

We are confident that we're going to hit the $320 million total for California, you think about that that was what was awarded in the last rate case, you know and that covers a three year period. So any any change in the amount of capex for San Jose water company.

Would shift into a future year.

But do we would still have some we would still complete the the construction necessary to deliver on the 320, which would allow for us to receive the third step increase in January 2021.

So and the rest of the changes while there might be some modest.

Changes in in period, but not in not in total so for example.

We've continued to work on the Soco River plant project in Maine.

Throughout this crisis, because it's just really getting started site work, but that's a two year plus project. So if were.

A little shorter this year it'll be longer next year. So so within a rate cycle for each of our jurisdictions it'd be the it'd be the same amount.

Okay. So we might think.

Maybe this year is a little lighter I mean, you've already spending ahead of that free 20 million reclassified the five year budget that you laid out the 1.2 billion or so that's probably still achievable by making it up in future periods.

Yes, that's it that's exactly right Jonathan I don't see any of our projects being canceled the as a result this.

Well, let me say this I'll give you an example, there's a.

Oh water main replacement project in Connecticut, that's in front of the hospital and that was scheduled for this summer. So our president there you know is reprioritizing the the pipe replacement projects and obviously not going to going to go after that one because of potential implications for continuity.

Service at the hospital, but then moving forward a lower priority relatively lower priority projects to fill that the.

Space, that's opened up by the delay of that other projects. So that's the approach were taken were not not reducing but it's more more rescheduling.

Okay, and then I think in Q1 or lease I made mistakes I got through to the call late too, but I think you've looked like it to some reserve related to cope with 19, what exactly did that relate to antennas that included in the new guidance range or is that on excluded items.

Yeah, I'll tackle a gym help as well to senses is related to a rise in uncollectable you know over 90 day accounts, but they're really frankly started a little before the coded crisis there had been a change in.

The termination procedures provided had allowed for by the California pre Pcs. So we had seen an elevation in they over 90 day accounts.

We did not.

Include that in our revised guidance, we expect to make that up through our normal course of operations.

Yeah, Eric that's exactly right.

The reserve is primarily tied to a two.

Our aging.

And at this point predominately a notification requirements that actually were changing at the beginning of the year as as necessarily oppose to what was the direct result of cobot 19.

Okay, and that's expected to be offset so okay, and then I'm just kind of curious the higher usage in California is that actually helped your margins right now or is it actually a net loss because as you know the incrementally higher cost to procure the purchase water to serve those sales like would you actually better off usage was down.

Jim you want to take from tackling yet.

Sure. So so clearly when you take a look at the amount of of per purchased water.

That we would need to acquire to replace the surface water, it's going to impact.

The margins.

And on and on an average basis.

I think we.

As Eric mentioned, it costs about $4.2 million breach billion gallons, we have to replace.

Between our own source water and the acquired water, so that is going to to reduce margins and and because or tracking this not only compared to last year, but also compared to our budget.

And it is below what we had budgeted and forecasted for the year. It will have an impact on the on the margin as we move forward.

Right, but would you be better office sales were actually down and therefore, you just have to tie. This additional water like is the cost of buying this you know higher cost water versus what's embedded in rates.

If it actually causing you to lose money.

As opposed to just losing those sales I'm not sure I'm asking that correctly, but.

Yes. The answer is no clearly whenever we get an increase in sales it if it benefits us.

The fact that you know we have repositioned the fix it and the Volumetrics fee.

In the.

In the the rate structure to provide more stability in the rate structure means that there is less benefit when you go over the.

The sale them out.

But any incremental amount we do.

We do a I get to benefit from by way of sales.

It did the cost of providing that is not is not more than the incremental benefit amount.

Okay, and then if I could tell you go back to have plenty earlier questions about the MCB any do you actually planned to file for that in the next rate case, you know without a kind of sister mechanism. The revenue mechanism because I know you guys have.

Denied getting both of those in place do you actually I am on that or is that just something you're saying, we're going to kicking around it and see if it makes sense and if there's no receptivity on the commissions art.

Jonathan I wouldn't say that we've got a firm plan to definitely do it but it's it's we're we're looking at it very hard we're not just kicking around because.

No I would rather have.

Stability than having a theoretical upside every once every 10 years to grab hold of you know so from my experience has been.

Having sort of a tracker with a maybe a band around the numbers so that you're not constantly adjusting it put your you're protecting customers.

The extreme upside and the company on the downside.

You know that makes her better.

Long term you.

Utilities, and I'd say I'd like to think through commission would be open to it I know they've been sensitive to the Ram side because of the big balances that.

Well, we're fortunate enough not to have but others do but obviously this this is a.

As a significant impact to our company and.

Certainly something we want to take a really hard look at and my bias would be to to try to work with the commissions or when we have things like this to two to provide more stability there.

Jonathan I know you've been very.

Astute around water supply for our California operations and I don't know when you came in but we put up a.

A graph and you could look at it at your convenience, but you can see out flashy that watershed is in 2019 in the space of just a couple of weeks.

We went from 450 million gallons to 2 billion gallons in that Hilsman reservoir and and that's typical it's like I said flashy you've got steep.

Steve canyons around that reservoir and when it gets a range stuck up on a mountain.

Nothing fills quickly. So we we were fully expecting to do a lot better.

Then we ended up here and and really didn't anticipate anything quite quite like this where we're just 45% of of last year and absolutely zero rain in February which as you know typically the highest month, but then.

Started with good March but it really tailed off so that's where we are.

No I think it'd be well received from the investment community, eliminating that kind of extreme volatility to if you could get in at least the on SCPA side through so I guess got to kind of watch what's going on with the Cal water rate case.

And those mechanisms there.

You know that hopefully the commentary is still positive around them.

I guess my last question is just going to be.

Real estate segment, I know, it's small but haven't talked about it any impact whatsoever.

From this.

No I know, it's small, but you know your tenants or leases there.

Now, it's a great question Jonathan Jim.

Jimmy manage that for us.

Sure. So at this point, Jonathan while you know the only real.

Income producing property, we have where we have tenants is our Knoxville facility and and right now.

Many of the businesses within that facility our shelf on in place but.

But thats the extent of any significant change it's been brought about by by the pandemic we've not.

Given any rent concessions at this point and not been asked to do so.

Okay. Thanks, I appreciate the time today.

Thank you John literally appreciate it.

Okay. It appeared that there are no additional questions I will turn the conference back over to Mr., Eric Thornburg.

For any closing remarks.

Thank you operator folks a this is national drinking water week, what's the time to to reflect on the the blessings, we have with great water supplies and safe drinking water throughout the country and boy, there's no but no more important time to be able to say that the right now with the when the simple act of being able to wash your hands as.

One of the the key keyed up.

Approaches to avoid any infection. So we really honor our water supply professionals and I have to tell you that those that STW group are among the finest I've ever met and it's a great organization that we appreciate your interest in our company and we'd ask you to join with us and celebrate national drinking water week.

And we'll look forward to speaking with you in the future. Thank you very much.

[music].

Ladies and gentlemen, thank you for standing by and welcome to be STW groups first quarter 2020 financial results Conference call. At this time, all participants are they listen only mode.

After the speaker presentation, there will be a question answer session to ask a question. During this session you would need your press star one on your telephone. Please be advised that today's conference is being recorded if required any further to that's please press star zero I would now like to have the copper so but your speaker for today Mr., Jim Lynch cheap funding.

Sure Officer. Thank you. Please go ahead.

Thank you operator welcome to the first quarter 2020 financial results conference call for STW group.

Well, great presenting today with Eric Thornburg, Chairman of the Board, President and Chief Executive Officer.

For those who would like to follow along slides accompanying our remarks are available on our website at www Dot STW group Dot com.

Before we begin todays presentation I would like to remind you that this presentation and related materials posted on our website may contain forward looking statements.

These statements are based on estimates and assumptions made by the company in light of its experience historical trends current conditions and expected future developments as well as other factors at the company believes are appropriate under the circumstances.

Many factors could cause the company's actual results and performance they differ materially from those expressed or implied by the forward looking statements.

For a description of some of these factors that could cause actual results to be different from statements. In this presentation. We refer you to the financial results press release and do our most recent forms 10-K, 10-Q, and 8-K filed with the Securities and Exchange Commission copies of which may be obtained on our website.

All forward looking statements are made as of today and that's JW grip disclaims any duty to update or revise such statements.

You will have an opportunity to ask questions at the end of the presentation.

As a reminder, this webcast is being recorded an archive of the wet and an archive of the web cast will be available until July 27 2020.

You can access the press release and the web site the webcast at our corporate web site.

I will now turn the call over to Eric.

Thank you Jim.

Welcome everyone and thank you for joining US Hi, NERC Thornburg and then as my ought to serve as chairman President and CEO of SGW group.

I would like to start by thanking all of our nation's essential workers or bravely serving us well in the front lines. During this extraordinary time.

Public safety employees, consisting of police fire <unk> emergency response, and health care professionals, all deserve our recognition and appreciation for their dedicated service.

In addition, we should not forget about those working in our grocery stores and other critical supply chain employees, who are potentially risking their personal safety to deliver essential services.

That's true W. group and its subsidiaries are keenly aware of and readily accept our public health responsibility to protect our employees customers and communities during the scope at 19 crisis.

We have over 700 passionate and dedicated water professionals, who are unified in their shared commitment to deliver on our public health mission. During this pandemic continued delivery of safe and reliable water service I'm incredibly proud and honored to serve alongside all 720.

Six of them.

Our response throughout this event.

Has been and will be guided by this fundamental principle.

Protect our people.

Protect public health and protect our brand doing what is right and that harmony with our core values integrity respect service.

Paschal Trust transparency and teamwork.

Our number one priority as we responded continues to be the health and safety of our employees.

As we carry out our critical role in delivering life sustaining safe water service.

We limited our teams work to mission critical activities, such as conducting emergency repairs water quality monitoring and operating our water treatment facilities under additional safety guidelines recommended by the centers for disease control, our local health departments, and our company health and safety X.

Works.

Earlier this year, we provided earnings guidance for the first time in our history as a public company.

We did so in order to provide investors with a clear sense of the underlying strengths of our company, having just completed a transformative combination with CTW S.

The worldwide events, we've experienced and since then we could not have been unforeseen at the time the guidance was given.

There is much we do not yet fully know in regards to the pandemic and its possible longer term impacts on our nations economy.

Rather I thought I could candidly outlined the sensitivities, we see in regards to the possible impacts from Kogan 19, as well as weather related challenges one of the guidance. We previously provided for 2020.

The current global Cobot, 19, pandemic is affecting our national and local economies due to mandatory orders limiting business as social activities to help protect public safety.

To the extent business customers in our service communities are closed or residential customers experienced a loss of income during this event it may affect water usage.

Customer's ability to make tightly payments for water service and ultimately our operating revenues.

At the same time state regulators have mandated customer protections, including a moratorium on shut off for non payment and waiver in certain late payment fees that may affect our cash flow.

However, our regulators also recognize the critical role our water utilities play and that our companies will incur additional operating expenses related to covert 19.

From remote work arrangements additional equipment goods and services necessary to maintain the safety of our people and facilities.

Anticipated increases in uncollectible accounts and the pause in construction work, we anticipate covert 19 will negatively impact our 2020 business plan and financial performance.

With the exception of Maine, all of our operating subsidiaries had been provided regulatory tools to deal with the Pandemics financial impacts.

I know they water has activated it's catastrophic event memorandum account to track incremental costs, such as bad debt waved connection fees and deposits and usage declines from authorized levels.

That's JW a T X establish a regulatory asset account to track expenses, including non payment and late fees.

And I'm also confident that the main public utilities Commission will be fair and reasonable in evaluating the impact on our operations there.

Through the end of Q1, despite thousands of close businesses.

I have not yet seen a material financial impact from Kogan 19 related events on SGW group.

Yeah, that's still there's much we do not know.

We do know that every $1 million of increased cost for whatever reason would have an earnings impact of three and a half cents per share.