Q3 2020 Spire Inc Earnings Call
[music].
Good day and welcome to the spire Q3 earnings Conference call. All participants will be I must follow me should you need assistance, they say well conference specialist, but also starchy popeyes here.
After today's presentation, there won't be an opportunity to ask questions asked the question in My Press Star then one on your Touchtone phone.
So withdraw your question. Please press Star then too.
Please note this about its being recorded I would now like to turn the call switch over to Scott Doubly. Please go ahead.
Good morning, everyone and welcome to our third quarter earnings call.
And our earnings news release, this morning, and you may access and on our website aspire energy.
There's no slide presentation that accompanies our webcast and you may download it either from a webcast site more from our website <unk> under investors and then events and presentations.
Presenting on the call today are Suzanne Sitherwood, President and CEO.
Steve Lindsey Executive Vice President and Chief operating Officer.
And Steve Rasche.
The vice President and CFO.
Before we begin let me briefly cover our safe Harbor statement and use of non-GAAP earnings measures.
Today's call, including responses to questions may contain forward looking statements within the meaning of the private Securities Litigation Reform Act 1995.
Although our forward looking statements are based on reasonable assumptions. There are various uncertainties and risks factors that may cause future performance or results to be different than those anticipate.
These risks and uncertainties are outlined in our quarterly and annual filings with the FTC.
And our comments, we'll be discussing net economic earnings contribution margin adjusted EBITDA and adjusted long term capitalization, which among others. Our non-GAAP measures used by management when evaluating our performance and results of operations.
Explanations and reconciliations of these measures to their gap counterparts are contained in our news release and in the slide presentation.
With that I will turn the call over to Suzanne.
Thank you Scott and good morning, everyone joining us for third quarter, I'd say first I'd like to say that I have fewer safe and healthy.
Many of US it's all their family members friends and colleagues are working feeney challenges and adapting today's challenging each and every day.
But the global pandemic, that's not over yet and racial uncle some doctors on our hearts and minds, it's important to have perspective and pay attention to the world around that.
It's also important during difficult times to look inward, reflecting on our and believe values and behavior everything that makes that's who we are because if these moments self reflection.
Fire outward action.
Fire, knowing who we are how to answer the many challenges I have a quickly changing work environment, while still delivering safe reliable energy to the people and community in Canada.
For example in the midst of ongoing changes related to the credit virus. It's why we did them as Byron like being imaginable, we stopped and asked ourselves how can we immediately shall we care for each other and care for the communities we serve.
No we quickly got to work to a job and focus on current mean I like to provide you just a few examples.
We expanded employee communications, including creating a mobile internet channel dedicated to Corona virus news.
If it didn't work from home environment wherever possible and offer friend of ours, specifically for all buyer feel employee.
Well the ongoing educational call for spire leaders I'm business operation safety guideline and how the key teams connected.
However shifts for each other to ensure seamless service for customers.
Rarely its dependent late fees and just connection for customers.
Matched new and increased donations to our dollar health program, they provide billing systems for customers struggling to making me.
Donated do this fire foundations to find local news release program across five states.
And fire employees, and then volunteering their time to help the communities we serve through our day forget program.
And then a world shifted again and call for Justice ACO do matter community.
Further elevated are usually more gathering all our leader and a virtual for up to focus on closing the distance between people.
While creating and includes an environment for all.
We did all that because our belief values and behaviors our culture, it's clearly define and no matter, what we always man who we are.
As an essential services designated by government authorities were part of our nation vital energy infrastructure.
And that comes with a certain level responsibility, rather we safely and reliably delivering energy the homes and businesses are doing our part and preventing the spread of Iris.
Well I'm proud to say that are incredible our employees that are amazing adjustments necessary to ensure that our customers and communities are being well served supported and kept safe and healthy as possible.
They've done this while actively embracing safety guidelines that extra layer said already full schedule.
And they've done that's why often saying super focused on delivering business results.
Many thanks are employed I'll now turn to our third quarter results.
Our net economic earnings were seven cents per share of higher gas utility earnings and better contributions from our midstream business were offset by lower results from gas marketing.
I'm pleased to know that we're ready to provide earning guidance for fiscal 2020 now that we have clarity on the Missouri pipeline replacement program.
We expect our net economic earnings this year to be in the range 370, 375 per share, reflecting our year to date result, and the impact of grown of ours and as for settlement.
Steve Rashly, we'll have more to say about our earning guidance range for this year.
With that I'll turn the call over to Steve Lindsey for an update on several important topic.
First I will speak to regulatory and legislative initiatives in Missouri regarding interest.
Then the revisions to our aspire storage development plan and finally, the continued acceleration of our capital investment program, which provides even safer more reliable system, while also resulting in better environmental performance.
Okay.
Thank you Suzanne.
Began by acknowledging the outstanding efforts of our employees during the difficult times brought on by the krona bars, and resulting economic shutdown.
You are providing great service for our customer, while taking extra care to ensure their health safety and well being as well as your own and helping support our communities and this time of need. Thank you all very much.
I'll begin my remarks with an update on the significant progress we've made with Missouri as Russ regulatory mechanism that allows for accelerator recovery capital invested in infrastructure upgrades.
Since our last earnings call the legislation pending in Missouri legislature to clarify the interest that you has been an accidental law effective August 28.
Clarification went to remove the worn out or deteriorates standard and specifically and able to recovery of intermittent plastics when cast our bare steel pipe is being replaced.
Have challenges we have in calendar from the off all accounts or OPGC centered on plastics and providing evidence the cast iron and bare steel pipes for worn out for deteriorated.
The legislation also sets the timeframe for the Missouri Public Service Commission render a decision at a 180 days, which reflects more reasonable amount of time to adjudicate Isrs cases.
It's still have the opportunity to fall two answers cases for calendar year.
We also settled our 2016 2017 and 2018 Isrs cases that were subject.
First Appeals court rulings last November calling for refunds of certain amounts collected and for the cases to be remanded back to Missouri Public Service Commission.
Under the settlement, we will continue to collect the amounts that were under dispute in the appeals.
However, we will be making a refund of $15 million in the form of a onetime customer bill credit in August.
Meanwhile, we're continuing to work through our 220 19 cases that are up Missouri Court of Appeals, where we expect the appeals process to extend through the end of this calendar year.
Our February 2020 years filing reached a settlement with the Missouri Public Service Commission staff Ano PC.
The study, which was approved by the commission our Isrs collection increased by an annualized of $11.1 million effective may 20, Phil.
Why does increase our annual his first run rate is $40.3 million.
Finally, we filed a new interest requests yesterday for $8.7 million, including plastics.
Overall, we were encouraged by the positive momentum we have in resolving isrs overnight, we've been dealing with for some time.
Turning to our capital program to drive growth give again increased our fiscal 2020 estimated spend.
We now expect our total for the year to be $10 million higher at $650 million compared or update last quarter with over 85% earmarked for gas utilities.
Our year to date spend totals $475 million, reflecting continued investment in infrastructure upgrades and new business at our gas utilities.
And as you can see our capex for our gas related business as a quite a bit lower due to the completion of the spire STL pipeline, which went into service last November.
In addition to driving growth you other important results of our investment in infrastructure upgrades, the better environment better environmental performance that we achieved specifically, we're continuing to drive lower methane emissions, which are already down 39% since 2005.
As we noted in our latest corporate social responsibility report, we're targeting a 53% reduction by 2025.
We've also achieved at 66% reduction in lease for thousand system out distribution pipeline over the last five years.
In addition to the environmental benefit a lower leak rate resulted in improved safety reliability and reduction, though and im expenses.
Lastly, let me review our revised development plan for spar storage that we announced in early July.
First I want to emphasize that were fully committed to serving our current and future storage customers. In fact, the plans. We have are designed to enable us to serve them even better in the future.
Our revised plan, which reflects analysis and input from nationally recognized experts on gas markets and storage engineering calls for a longer time horizon to optimize and positioned to facility to serve the western you as energy markets, which continue to evolve.
We are seeking commercial validation for our plan to ensure that there is demand for our services before we commit to the required capital.
We will make a sevenci filing with FERC body by early next fiscal year outline our development path and prove up the need for the expanded gas storage services, we're contemplating.
As you May recall, we went through the seven see process in advance of buildings spire STL pipeline.
In the interim we expect to invest $20 million over the remainder of fiscal 2020 and 2021.
Overall, we believe it will take two to three years to obtain regulatory approval and commercial validation well continue to demonstrate its operating performance.
As we announced earlier our revised development plan resulted in a 140.8 million dollar write downs fire storages asset value in our third quarter.
That I'll turn it over to Steve Rasche, It for a financial review in a big Steve.
Thanks, Steve and good afternoon, everyone.
Let me add might well wishes for good health and safety Turbochargers, joining us on the call today or who are listening afterwards.
To review, our quarterly results and then discuss our earnings and capital spend forward guidance.
Today, let me start with GAAP results the net loss for the quarter was $92 million, reflecting impairment charges totaling just under $149 million. This noncash charge includes two pieces first as Steve just discussed the write down of our storage assets totaling just under $141 million.
And secondly, a roughly $8 million write down of our commercial compressed natural gas or CNG fueling stations, principally the location and Greer South Carolina.
As we evaluated this venture it became apparent that the demand for CNG fueling is continuing to lag hours and market expectations. Due in large part to persistently low diesel prices, which make the conversion of class a trucks less financially attractive.
We've got an orderly process to exit the group facility in the next 12 months.
Results for the quarter also include the true up to bring gap and net economic earnings results in line with the $15 million for somewhat we announced last month.
Net economic earnings for the quarter were $7.3 million up 2.3 million from last year.
Results for seven cents per share in both periods, reflecting the impact of preferred and common stock issued over the last 12 months.
Let's take a look in the business segments on slide 11.
Gas utilities posted earnings of $8.4 million up $800000 from last year.
Key drivers include higher margins and lower expenses.
Contribution margins were up $2.9 million as higher net this first revenues demand and customer growth more than offset net cobot impacts a $2.5 million this quarter.
Operation and maintenance expenses were also lower and I'm I'll touch on that a more detailed just second.
Wonderful results also reflect significant improvement in other driven by earnings from both the spire STL pipeline and a smaller loss expire storage as planned.
Gas marketing earnings were down $3.2 million from last year, reflecting both less favorable current market conditions as well as higher cost as we take advantage of that market going forward.
He explained both in a bit more detail.
Beginning in March the market has seen a drop in natural gas demand as coded impacted not only domestic demand, but also triggered are significant drop in LNG shipments internationally.
While we have also seen contractions at the wellhead and we're now seeing a drop in flowing gas the impact today is significantly lower spot prices are summer prices and lower volatility.
This reduced opportunities we had for asset optimization this quarter.
Uncertainty regarding natural gas production demand and whether have kept the forward price curve high for the winter heating season, creating a seasonal price differential that was well over one dollar per MB. Two you until just recently in fact on with the last few days.
As a result of these market dynamics storage is now at a premium both to address excess flowing gas as well as to take advantage of that seasonal price differential.
Inspire marketing is taking advantage in that situation.
We have almost doubled our storage commitment going into winter locking in that seasonal price differential this positions us well for next winter, but it does push off our cost for fixed storage or the fixed towards cost this quarter and those will continue until we resolve and natural gas this winter.
There are two other variances I wanted to touch on this quarter.
A onetime expenses and other income.
Oh I want him expenses as reported were up two and a half million dollars, but similar to last quarter. The classification of pension cost and the benefit of regulatory deferral show up on different lines of the income statement.
Excluding this $9.5 million reclassification.
Net run rate going am expenses were actually lower by $7 million and a bit more than that in our gas utilities.
These cost savings stemmed from a realization of operational efficiencies timing and prior year cost does not recur this year.
And these savings more than offset the higher cobot related expenses that will talk about the second.
The other key variances in other income with a run rate decrease this quarter $2.9 million due to prior year. After year do you see from the spire STL pipeline remember is now in service. So its results show up in the other category above and the piano.
Note that there are additional analysis of cost variances contribution margin and year to date results in the appendix for your reference.
Turning to slide 13.
We have reduced our fiscal year 2020 estimated financial impact of Corona buyers to $6.2 million or nine cents per share reducing it by roughly two cents from our initial estimates last quarter.
Looking at the components.
Actual loss late fees for the quarter were $1.8 million, bringing total impact for the year to $2.3 million.
Margins were down for the quarter by $700000 as lower commercial and industrial demand were partially offset by higher residential margins.
This is an area we continue to watch closely, especially the small commercial customers who are bearing the brunt of continuing operating restrictions.
We're also seeing an increase in past due balances and our bad debt expense has risen this quarter by $3.8 million.
We expect to further increase in the fourth quarter as we rollout enhanced payment options for our customers.
And finally, other expenses, where we've seen a net savings for the quarter $400000 and forecast annual savings of roughly $1 million.
We also continue to pursue regulatory relief in Missouri, We have filed and AOE accounting authority order to enable us to differ for future recovery certain impacts of Corona virus, including lost fees bad debts, and net on m. costs or savings.
Alabama already has existing mechanisms that could potentially provide relief if the level of impact rises above certain levels.
Finally, let me turn to guidance.
As Suzanne mentioned, we reaffirm our long term net economics per share growth target range of 4% to 7% and with the clarity around distressed recovery in Missouri. We can now initiate earnings guidance for fiscal 2020 at $3 and seven eight to $3.75 per share.
This range fully reflects our year to date results as well as forecasted cobot 19 impacts I just talked about.
Our five year capital plan remains $2.8 billion with a reminder, that our plan is well diversified across a service territory and supported by programs with long lives and regulatory mechanisms that ensure minimal regulatory lag for over 80% of our spend.
This plan reflects underlined utility rate base growth of 7% to 8%.
Our financing plans remain on track, including modest equity needs for the remainder of fiscal 2020.
So in summary, werent solid shape and working through this most unusual year might say.
But we remain focused on delivering for all our stakeholders with that let me turn it back over to your Susan.
Thank you Steve.
Clearly this has been challenging year. However, we are up to the challenge our mission cause us to answer challenges.
As you can see at third quarter results fire employee, they're focused and working hard each and every day, we look forward to reporting year at year end result in November until then we'll stay focused on taking care employed serving our customers and communities that Karen compassion and being a vital part of our nation energy infrastructure.
Now we're ready to take your question.
We will now begin the question answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using it speakerphone. Please pick up your handset before pressing the kids. So withdraw your question. Please press Star then too.
This time, we'll pause momentarily to assemble our roster.
Our first question will come from Michael Weinstein with Credit Suisse. Please go ahead.
Hi, good afternoon guys.
Hey, Michael.
So the up 47% growth rate.
Yes look at 2020 Guidances baseline for that.
Michael This is Steve let me take a shot at that anticipated. The question you know it's funny as we sit here I'm not sure in your house were actually here together today, but most of the time, we're working from home and wonder when we're going to come back.
Into the office and yes. The big question that I think we're all wrestling with is what is 2021, it looks like and beyond.
As we launched our guidance and looked at our our compound growth rate.
You know we've looked at a couple of different ways.
We could try to calculate run rate 2020, I'm struggling a little bit whats run rate and what's not run rate when I don't really know what is 2021 now we could simply add back all of the one offs this year, which.
Some folks will want to do an add back 100% of the warrant a virus impacts, but I would.
Make the observation that that means in two months and a couple of days three months in a couple of days on October Onest that market is going to kept completely changed and we're going to be back to where we were pretty corona virus and I'm not sure that we're willing to sign up for that and again, that's just our view of the world, but there clearly things like it's Russ.
Settlement, all that which which aren't going to recur next year.
What we did do is we're always looking at a five or six year timeframe and so if I go back and we did as a team and look at where we were in 19, and then running forward through our five year plan. It clearly supports our compound growth rate of 4% to 7%. So I think we have great comfort that we're still true to how we're growing the business overall, how we end up.
Run rating 2020 is an exercise that we'll think about as we get to the yearend call. When we start talking about specifically 2021 guidance spread I could I could be all over the map and that honestly analysts investors are all over the map on how much to add back from a run rate basis, but I think we've been through to the fact that on a nominal basis. When you look at 20.
One over 20 of the growth rates could be higher they'd normally would because we are carrying some additional impacts all negative.
This year going into next and then we would acknowledge that but when we look into long term CAGR, we want to trying to isolate all that so I think we've kind of triangulated enough that we're comfortable with 4% to 7%. It if you need a baseline think of it as last year because that was before everything headed and we'll update our thoughts as we as we get to our yearend conference call.
Hey, Michael.
Yeah, just to add due at the thing we have a long track record in terms of our performance at their utilities and specifically relative to the capital.
It's been deployed year over year and our operational costs.
No that off again, I think greater degree of confidence wrapped around what the brassy just.
Yeah, that's kind of easy when you have rate base growth in utilities as seven 8% to get comfortable with our compound growth rate at the bottom line.
Right right and that makes sense.
In the hands fire storage.
Could you just remind us what's the remaining book value at this point, what's the what are your expectations for returns on that book value going forward and.
And also I guess, if things are already starting to turn around this year or at least the little better than you expected.
You know what when do you expect that to become a earnings positive.
EBITDA positive.
Yes, Michael Let me, let me start on that.
Yeah as we've talked about in early July that the netbook value for the business was just over $180 million. So so yeah. You know we're at about $40 million net asset value. After you take off the impairment charge. So that's right about where we expected in the middle of the range that we talked about and our view has not changed.
Just about the contribution of the business, where it stands right now without expanding it further.
After investing that nearly 20 million that we'll invest over the next 15 months so to speak and that is it'll be EBITDA positive. In fact, we are still on track to have positive positive EBITDA next quarter, it which was always the.
Target that we had told the market and from an earnings perspective, it's going to be right around breakeven it might be.
Within a million one way or the other of zero and again that that is the thing to focus on what we need to focus on is what we're going to do between now and the time, where we decide what our next step is and inspire storage and especially as we prove up where the demand would be.
And all of this this is Steve Lindsey really our short term goals coming into this year, we're really to solidify our operations through the winter, which we do and deliver on our customer commitments, which we did so I think we accomplish those thing and then as we alluded to really over the next two to three years and looking forward it's to obtain that.
Commercial validation is to give more clarity around evolving energy markets in the west and to go through some regulatory approval. So I think in the short term we accomplished what we were out to do this year, we're going to look forward for those opportunities, but still a that there's a little bit of a longer timeline than we originally bought and so that's where the a little bit of the pause as we look forward.
And Michael if you do and everyone on the call for that matter. If you recall, we brought in a season storage executive prior to the winter mine too I'm, giving that executive that runway do you get his head wrapped around the operations and so forth and they really did a nice top and you've seen that in them out in terms of the operational.
Past year and it really is a series of events you treat it operationally on storage as you know before you start highly engaging customers. We have many customers that are using the facility that can move that board and thinking about that capital plan deployed over time.
The customers come in and the type of services, they're looking for in our executive need if in a runway hammer offering in that runway, they're doing a really nice job happy about and on this topic is he's also hired recently a plant manager that is very experienced said that give him work now more capacity to go out and be more the customer side of his work now the here.
Satisfied in south around the operation of the Lenny and as well as that capital plan, making count Bill.
Oh, Hey, one last question on the same subject are you still looking at California is a major opportunity. There you know the Lisa Canyon situation.
At some point will that you said that the major opportunity for server storage or are there other opportunities that or even better.
It is one of the <unk> and Steve Lindsey mentioned <unk>. Besides our internal resources in terms of our market knowledge, we hired I'm sure that grip and very well known group that went to the gas industry holistically across the United States and then we hired another woman that much more tactical in letters and uses.
And also to somebody who really understand geology.
And so that's a broad way of saying that uses of that facility or more than just California, obviously, California significant, especially inside you know you power generation facilities. There that are added and how they're added and he intermittent uses that then and storage will play a significant role and.
And how that works for mid West and the western part of the country.
And so we feel like a you know with long view on storage. It will play a key role and the way that gap and though and the western sided andriana and we talked about earlier on her prepared remarks storage is not a valuable assets added relative to gap industry today in North America.
And that thank you very much congratulations on getting all that well have the a trip.
Or getting interest.
Resolve in legislation passed.
Great. Thank you.
Our next question will come from Richard since early with Bank of America. Please go ahead.
Hey, guys. This is actually Harry Thongs on CRE Ritchie.
Just a few questions.
Hey.
Oh, you are thinking about the pending 2019 illustrates appeal now that legislation has been signed and are you expecting any headwinds there refunds or because it's kind of be it wasn't Phil.
Paul opportunity given what you're currently booking.
Yeah, well and first of all clearly those the legislation that was basket will go into effect August 28 is forward looking so it's it's perspective, but but we think it does provide little bit of legislative in town as well as regulatory guidance as to how this should be approach again, we're still going through the process with the appeal. So I think it's early.
For us to be speaking anything relative to that briefs are being filed and as I mentioned that those will play through probably until the end of the calendar year. I think we were very pleased again to get to get the three put in in the past to get the 2020 settled and to get the legislation passed so I think we need to let the process play out for 2019, but I think we're very comes.
A couple with the I was just call it positive momentum that we're starting to see relative to definitions and the way the program really should be administered for our customers.
Got it that makes sense.
And then on the stores from what you guys you down.
Impacting your debt to cap do you guys say anticipate any incremental equity needs.
Kinda rightsize the balance sheet.
No I'm not the steep not none really anything that we would need would have already been contemplated in our our financing guidance and that hasn't really changed as a result of the developments this quarter.
Got it okay I'm as if I could squeeze one more and just to kind of clarify earlier question.
We should be using 29 team for the long term dps growth CAGR.
Yes, correct.
When I said wise, we're not we're I'm not going to play the base game, but I also kind of I'm completely understand that yeah. You can do it up run rate 20, which I wouldn't have a real tough time figuring out where run rate is because that forms an opinion on 21 and not any must have a crystal ball clear enough to understand wed specifically with covance.
Economic impacts how much of it as one off and how much of it is something that has fundamentally changed what our view is going forward and I think we've been pretty clear about that but I I did say that you can go back before this a 19 and run it as we have and it clearly supports our long term right. So if that if you want to call that facing up 19.
Fine because the numbers are in the books I think we'll continue to work at and rest assured and our yearend earnings call. When we launched 2020 guidance, we'll have a little bit better view I'm still not sure to be honest with you how I get to a run rate 20 without forming an opinion going forward about the economy, but we'll do our best Todd can make sure there.
I understand how we view, what our prospects aren't 2021 and beyond.
Are they understood. Thank you.
Thank you.
Our next question will come from Richard Sunderland with JP Morgan. Please go ahead.
Hi, Thanks for taking my questions.
Oh, okay.
Okay.
Just on.
Just starting.
With the commentary on marketing could you speak to a little bit more around beauty.
Costs incurred this quarter versus the position expected to benefit I'm 2021, and.
Anyway to think about what is locked in for next year.
Yeah, Hi, Richard This is Steve we obviously have fairly good and detailed view of where we are and what is locked and I try not to get to that level of operational details you have to give us the opportunity to actually work, but I would.
Try to answer it this way if you look at if you look at the difference between earnings this quarter inspire marketing and last year. The vast majority of that shortfall is really the feed cost of the storage positions a little bit of hedging.
Loss associated with putting the gas in the ground aside from that that positioning we would have been at or near the same earnings level that we had last year now yeah. If you think forward to storage actually plays out we will incur that storage cost for the fourth quarter and probably for a good bit of first quarter.
Next year before we would start withdrawing during the winter heating season, which will actually start out in November, but I would suspect that the meat of that that withdrawal is going to be in the January and February timeframe. So.
That as you think about the cost run rate at least give jill.
Better view of how to think about the cost in terms of via that the value that we're creating we wouldn't have entered the transaction had we not done the full analysis to show what the that said seasonal differential which is now below a buck, but and that's really a phenomenon over the last four trading days head.
Rehabs up 25 cents, maybe even 30 cents now versus where it was four days ago that baby technical but it may just be the start of a bigger move but that's seasonal differentials between a buck and about 40 per M. N B to you for the better part of the quarter. So yeah, we have a fairly significant amount of.
Well you that we've created that Weve when we look at it end to end, we're going to take the cost over the next two quarters or so two and a half waters, but we're going to create fairly significant value during the winter and it is a very very advantageous trade that we're not the only one is doing it theres not a lot of storage available right now and I suspect, we're going to get pretty close.
Two.
As they say the tank tops hot oil, we're going to get pretty close to a record levels of natural gas and storage. This year for all the reasons I talked about in the prepared remarks, and we do believe we're going to create fairly significant value, which may make some spire marketing is earnings a bit more seasonal this year than what you may have seen in the past, but again, we have to take advantage of the market when the mark.
It gives us these chances and and this is were not the market opportunity is at least for the first half of about 2021.
Got it appreciate the color there and then but just wanted to revisit the table on slide 13 on cold it impacts.
If I'm reading this correctly there several items that appear will be going in your favor next quarter I get somewhat of a reversal. Just curious if you could provide a little bit more color around those and if that's dependent on.
Regulatory relief.
Yeah, and rich said, it's a great question. So if you look at on Slide 13, there's really four lines. The lost fees is gone I. We are we're now back and a more normal operations mode. So you don't see any any change between the first three quarters into full year, we do expect that we will see.
A gentle uptick and residential margins in the fourth quarter, which were more than offset the exposure that we believe we see especially in small commercial and industrial sector, but as I said in our prepared remarks, that's still an outstanding question and then as you know the economy are those guys and gals really does depend upon.
In other jurisdictions, our and are they being restricted and how many people. They can have in the restaurant, but our best estimate is that we should be able to get a little bit of benefit of that in the fourth quarter.
Bad debt I spoke to on the call. We do expect those to go up as we get better information, especially on our Arrearages and then you are right. We continue to see some other cost naturally reduce and you can see that that that turns around it actually has a clawback as we get to the end of the year versus what we've seen so far this.
We are that's if you think about bad we incurred a lot of the cost early on in March and April as we were ramping up and protecting our customers in our employees that Medicaid It gave us a little bit a runway Todd did get our arms around other cost some of which just naturally are going to be lower like travel and entertainment, we're not doing a lot of that right now.
And probably will not be doing it for the balance of this calendar year as as most of our peers are also saying so that that will create an opportunity for us to offset a little bit more and if you step back and all our our estimates down the impacts down about 20% over where it was last year and that is really is.
In the offset of direct cost and then a little bit more favorable view of what the overall margin impacts going to be and that's offset a little bit by a bit higher bad debt expense.
Thanks running through that.
Right.
Our next question will come from Selman Akyol with Stifel. Please go ahead.
Thank you I just wanted to follow up on that last question it relationship tier.
Table, there and so I guess, how much of that do you expect.
To be recovered under the Hey, Bill and Alabama.
As we think that things going forward.
Yeah, so, but I I I'm reticent to estimate that we are in Missouri as we talked about we're we have filed for the A.O. We're in active discussions with the various parties, who would want to weigh in and well have to wait and see how that all plays out.
And I, if you step back from the question on Us and kind of look at it more broadly for utilities overall, because then you had a chance to chat with a lot of our peers I'm getting recovery and net cost increases is probably the easiest one for both us and regulators across.
North America to get their heads around because it's very easily definable and I think those had the highest opportunity I think margins are really tough.
Area for utilities broadly can get recovery on and I'm not sure that we we would expect to get that in Missouri, now I would say in Alabama, the mechanisms above certain threshold. So we have to have.
Adverse impact of a certain amount, but above those thresholds, we actually do get some recovery on west margins, we are not at that level, yet and we're not sure whether we'll get there or not and end up the last fees is really kind of in between the two I don't want a handicap that yeah. We clearly can show specific identification for those lost fees, which are mostly in the.
Gary and we're confident that we should be able to get some recovery of those now whether we get those immediately and you would see that benefit in the fourth quarter or whether we would be able to defer them and then can sit or them at our next rate case is another discussion that we'll have once we're further along in the process and Missouri.
Yeah, and I am I paid in kind of Alabama perspective, this year that typically about that it seems that there are certain thresholds because we basically have to utilities I in Alabama, and we've got that Birmingham, Montgomery, Alabama gap and I know you've got them they'll be up he had a different that points for bad today, but the real point I wanted to make as you recall, we had the RF.
I see in Alabama, and it goes to an annual reset. So all those observations are made can I read that yeah, then season and that the place they need to be and then prospectively, we manage the company and of that that try to process every decade. So.
It's an AD that Ben.
I appreciate that.
Then let me just as in terms of the bad debt expenses I know.
Difficult looking into 2021, but.
What do we expect that continue to accelerate as we kind of go into your peak revenue season.
Oh, it's up it's a great question and then I think some and that gets to the view of economic activity and 2021, and our customers abilities to pay it would sure feel like to us that the run rate bad debt expenses, which may have been it up at a lower leg.
Well I'm in 2019 in prior have probably moved up to a different level, but a lot of that is gonna be determined by things that are way outside of our control including.
Federal stimulus packages and support for unemployment things that we have no say on whatsoever, but I would say you not yet if we had to do a plus minus we clearly it looks like our bad debt expense run rate will be at a level that's higher than it was before we've been doing cobot stood for five months ago.
Okay and appreciate.
Yes, so the thing I would add is Suzanne hit on this early in her remarks was some of the things we've really tried to do proactively for our customers whether its energy assistance working on payment arrangements. We've really tried to step up what we can do because we know that not only are these very difficult times for the folks that normally are in those situations. There is a.
Lot of new people that have that have come into this scenario and so we're trying to do some thing no vegetate and help people through the process probably in them in a more advanced way than Weve, even done in the past.
Thank you for that I wanted to go back to storage for a minute and just make sure I'm thinking about this correctly and I appreciate it you're getting to break even.
And you're going to invest another.
20 million or so over the next 15 months. So by the time you get to 60 million do you still expect to be at breakeven or do we expect to start to Cvs it contribute albeit something small.
Yep.
It's going to be it'll move the needle a little bit it's still going to be around breakeven when you look about.
Net income impact, we clearly we'd expect the EBIT contribution to improve because what that 20 million allows us to do is to firm up the capacity that we can sell to our customers and we've seen.
Significant demand from our customers for from the storage services that we provide we have kept it at a level that we are comfortable delivering on our customers at and the 20 million will allow us to incrementally increase that comfort level, just a little bit. So it does help improve operating results I. It's it's such a small piece of our overall.
From a portfolio of businesses, so, but I wouldn't want to hang a lot on it either way until we decide what we want to do into longer term with our development.
Understood and then I guess.
Just.
One last question here can you guys Im just hearing about this from other places that I wouldn't normally suspected so.
Can you guys comment on hydrogen at all and you guys talking about that are you getting.
Anything out there as you look out 20 years it on thinking about your system et cetera.
Yeah, It's a great question and we've all read a lot about that and so obviously were intrigued about what we're reading as far as error and that being one of our strategic imperative. Obviously, that's not showing up on our list at least not yet who knows what the future hole, but it's not Ireland currently we.
They focus this year on all the different pieces that we've been talking about on their earnings call.
That is clearly not our focus after this year and going into next year.
Understood. Thank you so much.
Thank you.
Last question, so they will come from Brian there so with Sidoti. Please go ahead.
Hi, good afternoon.
Right right.
Most of my questions have been asked and answered I was just curious the last week case that was settled was that an all party settlements.
Are you talking about Missouri rate case.
Yes misery.
Yeah, we had debt side definitions when you settle a rate case, which we settled in the April.
Frame of 2018, we got to agreement with all the parties involved.
The phase that answer your question or do you have a follow on.
No no that answers my question I, just wanted to know who was CEO PC part of the settlement.
They are always part of the settlement and the discussions.
Okay, and then just remind us what the strategies with the Holdco debt I think you want it to be less than 20% of total debt, but where it is now.
You know what Thats great question I'd I'd give me a second here.