Q1 2021 SJW Group Earnings Call
[music].
Good day, and thank you for standing by and welcome to the SJW Group Q1, 2021 financial results conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session.
You will need to press star one on your telephone keypad. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Mr. James Lynch. Sir. Please go ahead.
You operator, welcome to the first quarter 2021 financial results conference call for SJW group.
I will be presenting today with Eric Thornburg Chairman of the Board, President and Chief Executive Officer, and Andy Gere, President and Chief operating officer of San Jose Water Company.
For those who would like to follow along slides accompanying our remarks are available on our website at www Dot SJW group Dot com.
Four we begin today's 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 to differ materially from those expressed or implied by the forward looking statements.
For a description of some of the factors that could cause actual results to be different from statements. In this presentation. We refer you to the financial results press release and 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.
Forward looking statements are made as of today and SJW group 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 and an archive of the webcast will be available until July 26 2021.
You can access the press release and the web webcast at our corporate website.
I will now turn over the call to Eric.
Thank you Jim welcome everyone and thank you for joining us I am Eric Thornburg and it is my honor to serve as chairman President and CEO of SJW group.
We're now more than 13 months into the COVID-19 pandemic.
I would again like to thank our employees and the nation's other essential workers for their efforts over the past year to serve customers communities and each other during the pandemic.
There is a sense of cautious optimism that the worst is behind us and we have begun planning for the safe return to our offices and work centers.
For the past year, we've learned much about our teams our culture, how we can adapt and what we can achieve through remote work. Despite.
Despite the challenges our people have personified our mission.
Rusted professionals passionate about delivering life sustaining high quality water and exceptional service to families and communities, while protecting the environment and providing a fair return to shareholders.
Looking ahead, we are preparing for a phased return to our offices and work sites building on our established risk based process that has served us well during the past year.
We will adhere to the safety guidelines provided by our National State and local health authorities.
Our goal remains the same as it has been throughout the pandemic to deliver on our public health mission is a water service provider and protect our employees customers and communities.
And the rest of our executive leadership team are looking forward to the day when we can express our appreciation to all employees in person and meet the new employees, who have joined our team over the past year without having set foot in our offices.
Our committed to a safe return that seizes the benefits of remote work, while providing a safe physical environment to nurture collaboration and our culture.
The extreme cold in winter weather experienced in Texas last February proof the benefits of a pure play water and wastewater utility with national scale geographic diversity and locally focused operations.
SJW group was able to draw on resources from our operations on the east and West coast to assist our Texas operation during the event.
While our Texas employees focused on system impacts.
Our Texas customers had their calls answered in the morning by our Connecticut call Center and in the afternoon by our California team.
Our communications teams from both coasts assisted with customer notifications as well as websites social media and news media updates, while our operations and safety teams provided valuable incident support.
The direct experience of the Connecticut, and Maine teams dealing with cold weather events added to our response.
In California. The rainfall season is largely behind US we have experienced slower than normal precipitation for the second consecutive year and that is impacting available surface water supplies produced from our watershed.
Like to now turn it over to Andy Gere, President and Chief operating officer of San Jose Water company to provide more granularity on our water supply situation.
Thank you Eric the very low precipitation that we've experienced in the Santa Cruz Mountains. This winter has had a significant impact on our local surface water operations. Both in terms of storm runoff collected at the Creek intakes for immediate treatment as well as the volume of water that we've been able to impound Lake Elfman reservoir for release later in the year.
For the first time in my 25 years at San Jose Water, we are temporarily taking our monitoring a water treatment plant offline due to low supply we will bring the plant back into service one hydrologic conditions allow.
About some perspective the chart on slide 10 shows the historic surface water production and blue compared with the associated rainfall at <unk> and read over the same period.
As you can see there's been just one other year 2014, where we saw such low levels of rainfall in surface water production.
Fortunately the regional water supply picture is somewhat better and despite the low rainfall and snow pack. This winter the total groundwater stores at the end of the first quarter remained at stage one for normal a valley water's water shortage contingency plan base.
Just on available recharge in the current rate of withdrawal.
Water reports that it is forecasting to remain in the normal range through year end by supplementing normal supplies with additional imported water that bodes well for the upcoming summer months. When demands are typically highest and we anticipate adequate supply to serve our customers with that I will stop and turn the call back over to Eric.
Thank you Andy.
As a result of the water supply situation in California, we anticipate increases in our operating costs through the reliance on purchased water from our wholesaler to meet our customers' needs in 2021 current.
Currently every billion gallons of purchased water has an incremental cost to the company of $4 $2 million more than using our own supply sources.
A direct result of the water supply outlook and in full transparency, we are announcing guidance of $1 85.
For $2.05 per diluted share in 2021.
This assumes no additional company produced surface water in California for the remainder of 2021.
We are in the process of updating our strategic water supply plan to evaluate current and future supply reliability and resiliency.
Our current California General rate case, proceeding will address the impact of surface water availability.
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 77 years and to have increased the annual dividend in each of the last 53 years delivering value to our shareholders.
I will now turn the call over to Jim who will review our first quarter financial results. After Jim's remarks, I will address regulatory and other business matters Jim.
Thank you Eric our first quarter operating results reflect new revenues authorized by our 2019, California General rate case water infrastructure conservation adjustment and water infrastructure surcharges authorized in Connecticut, and Maine and customer growth in Texas. These.
These increases were offset by a decrease in customer usage and the impact of our February ice storm in Texas and a decrease in available low cost surface water due to the dry weather conditions in California that Eric and Andy just discussed.
First quarter revenue was $114 8 million, a 1% increase over the first quarter of 2020 net.
Net income for the quarter was $2 $6 million or nine cents per diluted share an 8% increase over net income of $2 4 million or eight cents per diluted share reported in the first quarter of 2020.
The increase in diluted earnings per share for the quarter was primarily attributable to cumulative rate increases of eight <unk> per share cumulative cost savings of <unk> <unk> per share.
A tax benefit of <unk> <unk> per share and an increase in nonregulated income or <unk> <unk> per share.
The diluted per share increase was partially offset by a decrease in customer usage of eight <unk> per share.
Customer credits in Texas totaling <unk> <unk> per share issued in connection with the February ice storm.
A decrease in the availability of surface water of <unk> per share.
And an increase in depreciation and amortization of <unk> <unk> per share.
Our revenue decrease was the result of $2 $8 million and decreased customer usage.
In addition, customer credits and Texas reduced revenue by $700000.
Net changes in certain balancing and memorandum accounts reduced revenue by $600000.
These decreases were partially offset by $2 $8 million in cumulative rate increases and $500000 in revenue from new customers.
Total 2021 first quarter water production costs were slightly lower when compared to the first quarter of 2020.
The minor reduction was primarily due to $800000 and lower average per unit cost for purchased water groundwater extraction and energy charges and lower usage.
Actually offset by a $700000 increase due to the purchase of additional water supplies to supplement the lower level of surface water production, we experienced during the quarter.
Other operating expenses increased $1 $6 million or 2% for the quarter, primarily due to $2 $1 million in higher depreciation related to utility plant additions and $200000 in higher maintenance expenses, partially offset by $400000 and lower general and administrative.
Expenses.
In addition in the first quarter of 2020, we incurred $400000 in merger related expenses no.
Similar expenses were incurred in 2021.
The effective consolidated income tax rates for approximately negative, 52% and 15% for the quarters ended March 31, 2021, and 2020, respectively.
The lower effective tax rate for the quarter ended March 31, 2021 was primarily due to excess tax benefits relating to share based payment awards state tax credits and other discrete tax items.
Turning to our capital expenditure program, we added $46 $7 million in company funded utility plant during the first quarter of 2021.
This represents 20% of our total 2021 planned capital expenditures.
From a financing perspective first quarter 2021 cash flows from operations increased 321% over the first quarter of 2020.
This change was primarily the result of a decrease in accounts payable and accrued expenses of $8 $3 million, an increase in accounts receivable collections of $2 $2 million and a $1 $5 million increase in net income adjusted for noncash items.
In addition in 2020, we made an upfront payment of $5 million to the city of Cupertino in connection with our service, Kentucky concession agreement and refunded $8 $4 million to California Ratepayers net were accumulated in our 2017 tax Act memorandum accounts.
Similar payments were made in 2021.
In March 2021, SJW group issued approximately $1 $2 million.
Sorry, $1 2 million of new shares in an offering that raised net proceeds of approximately $66 $9 million.
Proceeds from the offering were used to repay outstanding balances on the company's credit facilities and for general corporate purposes.
In addition in April 2021, the company's California subsidiary.
Entered into a $140 million credit agreement and the company's Texas subsidiary entered into a $5 million credit agreement, both with Jpmorgan Chase Bank.
The new credit agreement to replace the existing J P. Morgan Chase credit agreement agreements, which have been paid off and we're set to mature and expire on June one of 2021.
At the end of the first quarter, we had $138 million available on our bank lines of credit for short term financing of utility plant additions and operating activities.
The average borrowing rate on line of credit advances during the quarter was $1 four 2% for.
With that I will stop and turn the call back over to Eric.
Thank you Jim.
SJW 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.
As Jim just mentioned, we have already invested approximately 20% of our planned 2021 capital spending through the end of the first quarter we.
We have high quality water systems throughout our service areas and are investing to sustain them for the benefit of customers communities and shareholders.
Other regulatory developments in the first quarter include the filing a general rate cases for both San Jose water and Connecticut water in January.
San Jose Water's JRC application proposes a $435 million capital program for the years 2021 through 2023.
Supported by our award winning enterprise asset management system <unk>.
New rates are expected to be effective in the first quarter of 2022.
California employees, a future test year, and thus the level of capital spend as authorized during each general rate case cycle.
Connecticut, Texas, and Maine employ a historical test year for capital investments not otherwise recoverable through surcharge mechanisms and expenses are recovered and subsequent general rate case filings after they have been incurred.
Connecticut Water's general rate case is the first since their last decision in 2010.
A primary driver of the case is the $266 million in infrastructure investments that have been completed and are providing a benefit to customers, but are not yet covered in rates.
For Connecticut public utilities regulatory authority or PURA is expected to issue a decision in the third quarter.
The Connecticut water rate case also includes tier grades for residential customers that promote water conservation.
In Connecticut pure regulated water utilities are able to collect their authorized revenues regardless of usage through the water revenue adjustment mechanism, which mitigates risks of such a rate design.
And support state policy goals for conservation.
A one 1% increase in the water infrastructure and conservation adjustment surcharge for Wicca was authorized by PURA earlier this year and went into effect on April one.
This covers $8 $7 million in qualified infrastructure investments that had been completed and will provide incremental annual revenue of about $1 million.
The current cumulative wick, a surcharge will be rolled into base rates and the surcharge will be reset to zero as part of the general rate case.
Maine water filed a general rate case application for its biddeford soco rate division requesting a $6 $7 million increase in annual revenues with the Maine Public Utilities Commission, where N PUC in March.
The application is driven by a $60 million replacement of the $18 80 for vintage drinking water treatment plant.
Maine Water's application includes an innovative proposal that would spread the increase over three years and roughly equal amounts.
A decision on the rates smoothing mechanism to authorize a customer surcharge starting in the third quarter of 2021 is expected in the second quarter and a decision on the requested revenue increase is expected in the second quarter of 2022 and alignment with the completion of the new water treatment.
<unk>.
These various state regulatory filings include capital investments that over the long term.
Benefits customers communities and shareholders as they enhance our ability to deliver safe high quality and reliable water service, while increasing rate base the earnings engine for the company.
We are mindful of the economic impact that COVID-19 has had on some of our customers over the past year.
Connecticut water is proposing a 15% discount on water bills for income eligible customers that is similar to a program offered by San Jose water since late 2000 and Fox.
Meanwhile, San Jose water anticipates, proposing a debt forgiveness plan for its water rate assistance plan or wrap or low income for low income customers.
The proposal includes tracking the forgiving of mild and San Jose Water's rap balancing accounts for potential future recovery.
On April 9th SJW, TX, our Texas water and wastewater utility executed the closing agreement to acquire the Clearwater is states water system.
This is the first acquisition completed by a regulated water utility under the states new fair value fair market value regulation.
The acquisition added 230, new customers gained additional water supplies to serve current and future customers and added rate base that reflects market value for future ratemaking purposes.
More importantly, the acquisition demonstrated that the fair market value process worked as envisioned.
This was the 13th acquisition completed by yesterday W. T X, which has tripled its customer base since 2006.
The company serves two of the top for fastest growing counties in the United States.
With a diverse portfolio of water supplies and continued additions to customer base through organic growth and acquisitions, we remain optimistic about the prospects for S. J W. T X and its increased contributions to consolidated earnings.
We are committed to investing in our culture diversity and the environment.
Our diversity equity and inclusion council has honestly and authentically guided our commitment to further build on our diverse and inclusive culture.
We strive to foster an environment, where all of our employees present and future are welcomed and comfortable being their true selves at work.
We have goals to expand our supplier diversity programs. So we can extend our efforts into the broader community.
At the board level SJW group is just one of the 150 for companies in the Russell 3000 to achieve a gender balanced board rating in 2020. According to the 50 50 women on boards gender diversity index.
We've set the foundation for creating a comprehensive greenhouse gas inventory across all of our operations.
Understanding.
Where we are now will allow us to set meaningful reduction goals for the future and develop prudent plans that will serve as a roadmap to achieve those goals.
Finally, I would like to thank Bob Danville for his 15 years of dedicated service to the company.
Bob has served as a director of the company since 2006 and as lead independent director since 2015.
Rob's knowledge of the water industry is second to none and his contributions to our company and stockholders are too long to list.
Moreover, you won't find a person in business with more integrity character and a genuine commitment to serve our company customers employees and communities then Bob.
Behalf for the board and all of our employees, we wish him the very best.
With that I'd like to turn the call back to the operator for questions.
Thank you and as a reminder to ask a question you will need to press star one on your telephone Anthony draw. Your question press the pound key.
<unk>. Thank you for any of us.
Our first question comes from the line of Richard tender that from Jpmorgan. Sir Your line is open.
Hi, Good morning cases, taking my questions today.
Yes, good morning, Richard.
Turning to the California Trc.
So can you speak more to the guardrails on the supply in rates.
About kind of the range of outcomes possible is this something we should think about in terms of.
Resetting our supply mix to more recent trends or are there other ways to address the volatility and recent low supply that you've been realizing.
Thank you Richard I'll start and then I'll see if my colleagues have anything to add.
Richard really the timing is ideal from that standpoint, obviously, we are just about to start are the actual hearings and our California general rate case and with the experience of the last two years. It will be very compelling evidence to support our proposal to reduce the mix of company owned surface.
Water supply and our overall cost structure. So we have put together I think are very dynamic presentation for the commission and the public advocates staff to review it shows a significant decrease in the surface water company on surface water benefit within the rate design.
And so we'll have to get into hearings in and support that but clearly the last two years provide real time evidence that a reduction in that mix is called for.
So and of course with the state's overall situation, where 95% of the state.
In anywhere from a moderate to an extreme drought condition I think it provides further support for making that adjustment.
Conversely, I am really pleased with.
The balance of our supply situation.
Round water table is strong and there is no indication there that we would need to ask for any manner.
Mandatory conservation so we have the water, but just in the in our purchase water and and our well portfolio groundwater supply portfolio.
Andy or Jim anything to add to that.
I think.
One thing I would.
Oh excuse me go ahead.
No go ahead Anna.
The only thing I would add is you know when we see a return to a wetter weather with our upgraded treatment plant work.
We're poised to capture a sort of a larger fraction of what what hits the ground because of our advanced treatment capability. So we think in the long run that investment is.
You're going to pay off but right now we're working towards those those lower forecast.
And then and then lastly, Richard the only thing I would say is that we are also oh.
About to begin the process for our cost of capital proceeding and certainly in our request for our authorized ROE.
We have highlighted the incremental risk that the.
The element of surface water has within our surface water supply.
Thank you for it.
I appreciate the color there.
Actually following up real quick on the cost of capital point.
So you know this sort of volatility.
From supply is guess inherent in the rate structure and as you pointed out east.
It's something you intend to highlight within the parameters of cost of capital.
Do you have any sense on.
How that has played out entire cost of capital proceedings, particularly the last round versus making the argument now certainly the recent history has highlighted this more so over the past two years. So it seems is front of mind, but just curious if you can provide any high level color on price.
For conversations here.
Yeah, I'd be happy to do that Jim why don't you start and then I'll I'll supplement your answer there.
Perfect. So.
Richard but it's kind of interesting is if you take a look at the cost of the water supply the cost to replace.
The surface water, it's gone up significantly over the past five to five to 10 years and.
It's only been in the the the recent for.
For a five year period, where we've seen some significant variations.
<unk> in terms of the cost of our water supply as a result of that and the precipitation variances that we've seen coming out of the watershed. So it's really come to the forefront now we've not included water supply in the past.
To my knowledge as a Ah indeed care at an Influencer. If you will on on a request on our requested ROE.
But we certainly are discussing doing so in this upcoming proceeding.
Spot on Jim I don't have anything to add to that thank you Richard any of the other questions from you.
No that's great. Thank you very much for your time today, yeah. Thank you Richard really appreciate your interest.
Thank you. Our next question comes from the line of Angie Sharansky from Seaport Global Your line is open.
Thank you so I'm.
Oh, Okay I mean.
The guidance looks bad even against they think low expectations.
And I understand that the.
The incremental cost for purchased water. So I'm just wondering if there are any credit implications that that you might see this year on the back of the total earnings and that's low cash flow that you expect.
Andrew Thanks for the question Jim.
Yeah, you know Oh, Gee I don't I don't think so I believe that.
Most of our creditors look at the company's ability to to go in and and recalibrate our within a three year period within a rate case and I think they all understand that we are at the forefront of our next rate case and have an opportunity to address the situation is.
We go in I would expect there to be more of a long view in that regard as opposed to just what has happened this end in the prior year.
Okay, and then looking at year over year changes in usage patterns I mean.
I understand that the COVID-19 related restrictions are a total.
For our society. So we help them, but you are you still seeing the elevated residential usage.
And is that that helped petco had especially in the fourth quarter of last year could you embedded in your guidance for 'twenty one.
So Eric I'll I'll I'll take that.
So angie.
If you take a look at the the real weather influence.
Influence in 2020, our that's why we benefited significantly there was more of an offset if you will last year with regards to COVID-19 between our usage at the residential level and our usage in business in terms of a drop off in business N. A N a increase in residential.
We're actually starting to see business return, a little bit, which is very encouraging, especially in California, where we don't have any decoupling mechanism in place and so you know when we set the guidance, we said it assuming a somewhat of a return to normal usage.
Through a balanced between what we will experience in our.
Residential and what we would experience in our business usage customers or customers.
So what happens.
I'm debating that myself. So if there are any sort of local restrictions our conservation calls given how how dry it is.
Especially in northern California, and how.
Would that impact.
That range and again I appreciate the fact that the the.
Hotter than normal weather.
To drive the I forgot 10, or 15 cents Aryans last year for since your guidance and I'm just basically wondering.
It's a conservation whether it be imposed if it's actually if it could actually go the other way.
Sure I'll take that first Jim So you know the.
The very conditions that have reduced our surface water benefit can drive higher sales right. So if we continue to have.
Above average temperatures through the year and no additional rainfall it's reasonable to expect that we'll see some increased usage across across the state of California and through our service territory. If no drought has declared with attendant mandatory conservation you know.
Then I would expect to see our sales and production levels increase accordingly.
For drought is declared and there is mandatory conservation required then we have protection on the downside through the WC MAA application with the California, PUC, but we wouldn't enjoy additional upside if customers complied with that request. So I think those are kind of the the railings.
It will Angie that I see.
Okay, and then lastly, the penguins here I see so.
You haven't changed your expected production or Sop production volumes right at one eight.
Gallon sales fans, which is helpful for meaningfully higher than what you realized in 2020 and what we're realizing from 'twenty. One so why wouldn't ship basically attempt to modify that that expectation going forward and I understand that day two.
Two particularly dry years, but again I mean, you'll have a chance to protect.
Protect yourself in this filing again similar outcomes from an earnings perspective, the fact that as we see now and now in two years in a row.
Yeah of course, you know.
Remember the case was filed back in December and January so before the end of this rainy season. So we will have the opportunity to update our evidence and have discussions with the public advocate in and with the commission and put forth.
<unk> K supported by <unk>.
Just one years of experience because you do maintain some credibility here you have to look back over a reasonable period of time as well. So so we're going to do all that we can to make sure that we balance the risks and the benefits here cause surface water can be a substantial benefit as we saw as recently as 2019, where we had oh.
For 5 billion gallons of water that we could use and so we want to balance the risk.
The risk and the benefit here and put forth a strong start.
From a case to do that so so we're updating our information Angie.
Okay and last day is.
I mean, I know that the Connecticut rate case is still pending but is there any comments you can offer as to potential settlements.
Email contentious points, thus far in the process.
Hello.
Recently completed the first round of hearings over there our team.
<unk> reported that.
Sounds like that process went went well.
You know there was a real interest on hold.
By all parties to make sure that they understood understood the facts and the evidence from like there wasn't any any tone or tenor that caused us any concern.
I'd say the big discussion is on on.
The cost of capital.
That's it's been quite some time since our last rate case, there and so my understanding there was a considerable.
The amount of time spent on that testimony from our witness as well as from the consumer accounts was witnessed so but I wouldn't describe it as contentious who was just you know a lot of a lot of attention paid to that particular point.
And I'm, sorry, I forgot to ask about the cost of capital in California, given the upcoming filing.
No.
Given the experience of the last two years.
Will you try to ask for some sort of in a row at or and you know given the volatility in earnings you're experiencing for San Jose water.
Yes, where we're discussing that we haven't filed our information yet of course, and but I think we can make a clear case for <unk>.
As a result of that volatility that that needs to be addressed in our cost of capital. So.
So we're planning a multi pronged approach here in our general rate case, and our cost of capital proceeding and.
Well working with our wholesaler and we'd like to address this issue.
Great. Thank you.
Angie.
Thank you. Our next question comes from the line of high volume goes out from water asset management share.
90, something.
Yeah, Hi, good morning, gentlemen, I just wanted to understand.
Couple of your underlying assumptions are a little better first on the <unk>.
Total water available you know last year, you mentioned that the total water available in your California watershed. Once between 1 billion to $1 2 billion gallons that was last year. So for my first question is.
How much in billions of gallons do you have.
Right now in your watershed absent any additional rainfall.
Sure Andy you want to provide provides that.
Yes, I'd be happy to unfortunately, we have very little impounded in.
Outside of.
You know some environmental pools, we need to make.
<unk> maintained for wildlife, there's about 150 million gallons available to treat.
So what does that then what is the current surface water level at Lake Osman roughly.
So it's it's about double that so we need to leave in environmental pooled about $150 million. So we have just under 300 million gallons in the reservoir at this time.
Got it so basically essentially zero you'd be it tends to be buying.
This drove me would you had from.
May cause meant into purchase water and I just wanted to find out because last year I think you.
Gabe this is a big amount of water you'd be buying so in terms of billions of gallons.
How much purchase water do you assume you would be buying in 2021 and billions of gallons.
Jim do you have that information or at least the incremental portion over.
For the surface water benefit yeah.
Yeah.
I'll take that Eric so so effectively.
We had baked in about a $2 5 billion gallons to R. R.
Original thought process as we were looking at at 2021, which is in.
In line with.
What was in our rate case as well as.
Closer to the average over over an extended period.
So we for the year will be buying incrementally about 2 billion gallons.
So in total you'll be buying life for in a half a billion gallons for.
Water.
Well again, we purchase a lot of water from the Santa Clara Valley Water District and I.
I believe about 50%.
Thereabouts of our of our total supplies are are purchased and 40% are pumped.
From which we pay a pump tax so all we're really talking about right here on says the.
The Ah.
Incremental piece.
Yes.
That's why I mean, the water that you are not getting from Lake and then you are buying and I. Just wanted to understand is that incremental purchase is that basically for and a half.
Billion gallons or is that a different number no it would be 2 billion gallons.
2 billion gallons okay.
And Jim My follow up question for you on on the tax rate in terms of the tax rate for Q2 and remainder of the year do you should we assume a more normalized.
Normalized tax rate.
Do you kind of think about that.
I would assume a more normalized tax rate, we typically in the first quarter, that's our lowest income producing quarter.
And at the same time, it's when we.
<unk> able to recognize tax credits.
For example for equity awards that are issued in the first quarter related to the prior year.
And so there's a kind of at a disproportionate amount of tax credits that we received.
In that quarter, it'll it'll average out over the remainder of the year towards a more normal rate.
Okay and I just wanted to ask for one closing question for Eric in Connecticut.
Given your background in the state I'm sure you saw yesterday that they get commission on it.
Different proceeding for Connecticut light and power.
Dealing with the hurricanes in that state lowered the ROE on a punitive basis for Connecticut light and power by about 90 basis points. So I just wanted to get your thoughts are in terms of the risk on the ROE in your rate case, given now that the Connecticut light <unk>.
<unk> ROE is closer to 8.3%. So how do you kind of think about the risk in the auto and candidate in light of Yesterdays.
Ruling.
Thanks, Hassan I would completely decouple the events.
The issue involving electric utility you mentioned I can recall for incidents and my time associated with Connecticut, where our operations were without power some for as long as a week or more.
And so.
My read of that situation was that PURA.
Had enough and and decided to implement a penalty on the ROE.
The increase it.
And.
If you look back the track record with ROE for water has been higher than the electrics and I believe that that is rooted in the view that water utilities are more of an environmental utility and that are attracting and supporting capital investment in water.
It is very important and as part of protecting and preserving that natural resource.
So if anything I feel like the Connecticut regulators really understand.
The primacy of drinking water investments.
Thanks for us on for your questions today.
Thank you. Our next question comes from the line of Jonathan Reeder from Wells Fargo. Sir Your line is open.
Hey, good morning.
A lot of my questions have kind of been asked if I can just take the previous discussion a step further trying to reconcile the guidance with what it would have looked like had you had that too.
<unk>.
<unk> billion. So Jim you said 2 billion.
Incremental purchased water.
And that's at that for $2 million cost per billion gallons, what kind of tax rate should we be I guess kind of be applying to that.
Yeah, I think you know our attach rate.
Is typically between 15 and 20%.
Depending upon the discrete items that we are able to.
<unk> worked through the tax provision in any in any one year. So I would focus on a range within within that that span.
Okay.
Alright, that's helpful.
And then I may have missed you specifically addressing it in an earlier in the Q&A, but any sense, how you request a low for the.
$2 5 billion gallons of surface water in the Permian <unk> is being received by Intervenors is that $1 8 billion Dnb.
<unk> viewed as reasonable and I know you were saying that they look at you know more of a five to 10 year kind of window is the $1 eight being viewed as you know reasonable or is there pushback still to that.
I'll take that Jim I wouldn't comment on it today.
Jonathan you know, it's very early in the process and.
What I would say as you know certainly the experience for the last two years really puts an exclamation mark on it. So so I feel confident that we have had a very strong case for for modifying significantly the surface water company owned surface water benefit in our rate design.
More to come.
Okay, Great and then in Maine and in that rate case, if that rate smoothing tier is adopted will you recognize the revenue as it's collected or would the rate increase not be flow through the financials.
Until after the rate decision is received in Q2 2022.
More Jimmy OKE cash flow versus an actual earnings perspective, yeah. Thanks, Jonathan Jim you have that one yeah.
Jonathan it's more of a cash flow issue it's more.
Easing in the.
Net incremental rate increase over a period of time and lessening the shock to the rate payers there but.
But we would not be recognizing that as revenue until the asset is put it but basically the plan is put in service and were entitled to began charging a higher amount for that for that asset.
Okay, and then lastly.
For the danced around it but the cost of capital and at Cal water indicated they plan to request a 10, three five and no change in their authorized capital structure.
In their slide deck today, any kind of preview you're willing to provide you know.
Even if it's not on the ROE at least cap structure.
Yeah, we're still finalizing that Jonathan so it'd be a little premature for me to talk about that at this point.
Okay I got it no appreciate all the details provided in the Q&A that's been helpful.
Thank you Jonathan.
Thank you there are no further questions in the queue presenters. Please continue.
Very good. Thank you so much operator, and thank you folks for joining our call today, we will keep you keep you posted and we appreciate your support and interest in the yesterday W. A group. Thank you very much.
This concludes today's conference call. Thank you for participating you may now disconnect.
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