American Water Works Company, Inc. (AWK) Q1 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to American Water's First Quarter 2016 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast with an accompanying slide presentation through the Company's Investor Relations Web site. Following the earnings conference call, an audio archive of the call will be available through May 12, 2016 by dialoging 412-317-0088 for U.S. and international callers. The access code for replay is 10084204. The online archive of the webcast will be available through June 06, 2016 by accessing the Investor Relations page of the Company's Web site located at www.amwater.com. After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Again please note today’s event is being recorded. At this time, I would now like to introduce your host for today's conference, Greg Panagos, Vice President-Investor Relations. Mr. Panagos, you may begin.

Thank you, Jamie. Good morning, everyone. And thank you for joining us for today's call. We will keep the call to about an hour. At the end of our prepared remarks, we will open the call up for your questions. During the course of this conference call, both in our prepared remarks and in answer to your questions, we may make forward-looking statements to represent our expectations regarding our future performance or other future events. These statements are predictions based upon our current expectations, estimates and assumptions. However, since these statements deal with future events, they are subject to numerous known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from the results indicated or implied by such statements. Additional information regarding these risks, uncertainties and factors is provided in the earnings release and in our 2015 Form 10-Q each as filed with the SEC. I encourage you to read our Form 10-Q for a more detailed analysis of our financials and other important information. Also reconciliation tables for non-GAAP financial information discussed on this conference call including adjusted return on equity and our O&M efficiency ratio can be found in the appendix of the slide deck for this call which is located at the Investor Relations page of the Company Web site as well as our earnings release. We will be happy to answer any questions or provide further clarification if needed during our question-and-answer session. All statements in this call related to earnings and earnings per share refer to diluted earnings and earnings per share from continuing operations and now, I will turn the call over to American Water's President and CEO, Susan Story.

Thanks, Greg. Good morning, everyone and thanks for joining us. With me today are Linda Sullivan, our CFO, who will go over the first quarter financial results; and Walter Lynch, our COO, who will give key updates on our regulated business. The employees of American Water delivered strong results in the first quarter 2016 through the continued execution of our strategy, these strategies include, building constructed regulatory relationships through transparency, providing excellent service to our customers, growing our businesses, and continuing to become even more efficient in our operations, to ensure affordability for our customers. As you can see on Slide 6, we’re off to a solid start in 2016. We reported operating revenues of $743 million, a 6.4% increase above first quarter 2015. Earnings from continuing operations were $0.46 per share to the first quarter a 4.5% increase above first quarter 2015. Turning now to Slide 7, let me just discuss a few highlights of our strategy execution, as you know the foundation for our earnings growth is the capital investments we make in our regulated operations, to provide clean, safe, and reliable service to our customers. Capital investment through March 31, 2016, totaled about 236 million with 202 million in our regulated infrastructure investments. We plan to invest 1.3 billion to 1.4 billion this year of which 1.2 billion will be dedicated to water and wastewater system improvement. We're able to make these needed investments while minimizing our customer bill impact by our continued focus on controlling O&M cost and through constructive regulatory mechanisms. Walter will talk more about these in just a moment. We had excellent growth news during the first quarter, a special highlight with our announced acquisition agreement with the Scranton Sewer Authority. Our Pennsylvania employees have provided water service to this community for decades and we're excited for the opportunity to be the future wastewater services provider to those 31,000 customers in Scranton and Dunmore. We also closed seven acquisitions in six different states during the quarter, welcoming another 7,000 customers to the American Water footprint. Walter will also share with you an exciting announcement from just last night which will add 3,100 more new customers. Moving to our market based businesses. In February we began providing water and wastewater services to the City of Camden New Jersey through our contract services group. We already serve a portion of Camden through our regulated New Jersey American Water subsidiary and we're excited to serve the rest of that community. Camden will also be the home of our future corporate headquarters later this decade. We continue transition activities at Vandenberg Air Force Base and we look forward to serving our country's fine military men and women and their families there beginning June the 1st. This is our 12th military contract which we announced towards the end of last year. We do see a few challenges this year in American Water Enterprises or AWE and Keystone Clearwater. Earnings were flat in AWE compared to the first quarter of last year mainly because we accelerated $1.5 million in homeowner services’ marketing cost into the first quarter of this year. The first quarter results in our military services group were up compared to the same period last year. But we expect federal budgetary constraint to impact planned future capital upgrade projects for the remainder of 2016. That said, we are seeing significantly more bases in the RSP pipeline for privatization. We continue to believe in the long-term growth potential of this business segment. Keystone continues to manage through the current challenging market, characterized by low natural gas prices and excess supply. These conditions have persisted longer and been more severe than we originally anticipated and discussed with you at our Investor Day on December 15th, when we shared that we believe that Keystone would be accretive to earnings in 2016. However, through a sharp focus on cost management as well as continuing to expand our customer market share in Appalachian Basin we expect that Keystone will be earnings neutral and cash flow positive for us in 2016. The energy information administration and many industry experts are predicting decreasing natural gas supply by late fall and increasing prices later this year and into 2017 and our own analysis tracks with these projections. We believe our business model, growing market share and solid balance sheet for the business will be a competitive advantage for us as the market recovers and other water services providers have found it difficult to survive. We're committed to Keystone and still believe is the good strategic fit for us going forward. As Slide 8 summarizes, we continue to make progress toward achieving our near and long-term goal based on the results for the quarter, we affirm our 2016 guidance of 2.75 to 2.85 per share. We also continue our progress toward achieving our long-term goal of 7% to 10% EPS growth through 2020. Based on our solid performance our Board of Directors increased our quarterly cash dividend payments by 10.3% from $0.34 to $0.375 per share in April. This is our fourth consecutive double-digit increase in dividend. This also continues our commitment to provide strong dividend growth aligned with our financial performance while also providing needed investment in our system for the benefit of our customers and our community. With that Walter will now give you his update.

Thanks, Susan. Good morning everyone. As Susan mentioned, we are off to a solid start in 2016, growing our customer base, continuing our commitment to investing in our infrastructure, while focusing on improved O&M efficiency and cost reductions to mitigate the rate impacts for our customers. In recognition to the investments we make to ensure clean, safe and reliable service, we received the rate order in West Virginia during the quarter, reflecting an annual revenue increase of $18.3 million. The main driver of the request was the $167 million we've invested since 2012. Key to this investment is our continued commitment to manage expenses. We reduced operations and maintenance expenses by $1.1 million compared to our last rate filing which was about four years ago. This past week, we filed a request for a DSIC style mechanism in West Virginia known as an infrastructure replacement program or IRP. IRP has modeled after rate mechanisms recently afforded gas utilities in West Virginia, if approved the IRP would begin on January 01, 2017. Our commitment to investment in infrastructure while focusing on customer affordability is clear in the cases filed during the first quarter. In Illinois we invested $342 million since 2012 and reduced operating expenses by 3%. In Kentucky we invested almost $79 million since 2012, while keeping our operating expenses flat. We also filed three other rate cases since the end of the quarter. In Iowa and New York we requested an additional $13.6 million in combined annualized revenue. In California, we filed a proposed application to set new rates in each of our service areas for 2018 through 2020. The new rates would take effect January 01, 2018 pending approval by the California Public Utilities Commission. The application is seeking to raise revenue by approximately $50 million over the next three years beginning with a $34.8 million increase proposed for January 01, 2018. The California Public Utilities Commission which is the lead agency for the environmental review of the desalination portion of the water supply project has informed us that the review is delayed for about a year. Our team in California along with public officials and many other stakeholders is working with the commission to mitigate the impacts of this delay. Following our request the commission issued a ruling agreeing to expedite its consideration of two other portions of the water supply portfolio, which includes groundwater replenishment and aquifer storage and recovery. And together these projects will provide nearly half of the water needed in the Monterey water district. Finally as part of our ongoing investment in our systems, we dedicated a new $18 million dewatering facility in Tennessee. This plant will reduce sludge effluent sent to the local sewage treatment plant by 95%. While the capital cost of this facility impacted rates about $1 a month for the typical Chattanooga water customer, the project reduces operating expenses and has added a couple of permanent jobs. It also provided 150 to 200 jobs during construction. As you can see on Slide 11, those benefits were recognized by City Council Chairman Moses Freeman who said “this is proof positive that these rate increases are improving the water for our people. All of this is for the betterment of our water and the community”. On Slide 12, you will see the success we've had in working with state governments and legislation enabling solutions to water and wastewater challenges. In Pennsylvania this past April, the governor signed fair market value legislation into law. This authorizes water and wastewater companies to pay for and earn on municipal water and wastewater systems at appraised value rather than at the depreciated costs. In Indiana, the governor signed two pieces of legislation into law Act 257, the Distressed Water and Wastewater Utilities Act allows for water and wastewater systems of any size to qualify as distressed. This opens the appraisal process to a simple agreement between Mayor or council and the perspective buyer, and the utility determined to be distressed will not be subject to the existing referendum laws. The second piece of legislation signed into law was the System Integrity Adjustment Act. This act creates the first water and wastewater revenue stability mechanism in state history, allowing for a recovery of differences between authorized revenue and actual revenue. As you can see on Slide 13 during the first quarter, we closed on seven acquisitions in six states, welcoming approximately 7,000 new water and wastewater customer. As Susan mentioned, we're pleased to reach an agreement with the Scranton Sewer Authority. This is the perfect example of the type of solution we can bring to communities, with long-term rate stability being one of the most important benefits for our customers. In fact the cumulative savings in customer sewer bills would total more than $350 million over the next 30 years. This translates to approximately $7,600 per residential customer, a pending regulatory and environmental approval as we anticipate closing this acquisition by September 30th. Additionally, Pennsylvania American Water just announced that we signed an agreement pending regulatory approval to acquire the wastewater system of the Borough of New Cumberland. This system serves 3,100 customers again this system is an area where we already provide water services so we're really excited about the opportunity to be a future provider of wastewater services for our New Cumberland customers. You can also see on this slide how legislative efforts are helping us to provide water solutions across our footprint. Moving to Slide 14, we continue to improve our O&M efficiency ratio, achieving 35.6% for the last 12 months. Again we're on track to meet our O&M efficiency target of 34% by 2020. So let me give you a couple of examples of what we're doing to drive these results. The first example is in Illinois where we’re using geographic information systems or GIS to map key components of our systems. This work improved our hydrant and valve inspection program by removing the overlapping routes and reducing travel time and fuel costs. In one district alone, we're able to cut annual travel distance by more than 5,500 miles. The GIS mapping information is also used to better identify and prioritize areas to invest capital by locating areas more prone to main breaks, we can maintain our systems while minimizing costs. The second example is in West Virginia, where our team has deployed new technology and practices to reduce unaccounted for water. By investing in a new leak detection system and utilizing a number of management tools such as industrial side audits and district metering area analysis, we identified specific areas for corrective actions. These efforts have reduced unaccounted for water from 28% to 22% in a 12 month period, reducing the amount of unaccounted treated water by 1 billion gallons during that period. These are just two examples of what we're doing to achieve this target. It’s a great effort across the business and it’s all about bringing value to our customers. And now I’ll turn the call over to Linda for more detail on our first quarter financial results.

Thank you, Walter and good morning everyone. In the first quarter of 2016, American Water continued to deliver solid financial results. Slide 16 shows the contribution by business segment to our quarterly results. Earnings per share from continuing operations for the first quarter, was $0.46 up $0.02 or 4.5% over the same period last year. The regulated business contributed $0.49 up $0.04 compared to the first quarter of 2015. The market based businesses contributed $0.03, down a penny compared to the same period last year. With AWE coming in flat compared to the prior year and Keystone coming in with a slight loss. Parent which is primarily interest expense on parent debt was as expected down $0.01 versus the same period last year. Turning to Slide 17, let me walk though the components of our quarter-over-quarter increase in earnings per share, the primary driver was our regulated business, which was up $0.04. Regulated revenue was up $0.06 from authorized rate increases, infrastructure surcharges and the new revenue from recently completed acquisitions. Depreciation was up about $0.02 primarily from growth associated with our regulated system investments. The market based businesses were down $0.01 for the quarter. Keystone, which was not included in first quarter 2015 results, reported a net loss of about $1 million or $0.01 per share. As Susan mentioned, natural gas market conditions are more challenging than we anticipated at the start of this year, the rate count in the Marcellus and Utica is about half of what it was last year. As a result we’re not planning for drilling activity to pick up in 2016, and Keystone has taken austerity measures which began in early March to position it to be earnings neutral in 2016 and we expect Keystone to generate positive operating cash flow. AWE was flat for the quarter due to accelerating 1.5 million of pre-tax marketing expenses in our Homeowner Services Group to the first quarter. We accelerated these expenses because of a planned system implementation in July. Military services results were up for the quarter but we expect a reduction in the amount of capital upgrade on our existing bases in 2016, due to reduce military base budget. As we’ve noted previously these capital upgrades can be lumpy in nature from year-to-year based on the Department of Defense budget cycle. However we’re seeing stronger activity for base privatization request for proposal and we continue to see the long-term growth potential of our military business consistent with our five year plan. Now let me cover the regulatory highlight on Slide 18, we currently have six general rate cases in process for a combined annualized rate request of 110.6 million. This includes three cases we filed post quarter in Iowa, New York and the preliminary application in California. Additionally in April, the Missouri PSC approved the stipulations in our general rate case. These provide for 4.7 million of additional revenue, which excludes infrastructure replacement surcharges of 25.8 million. This case is subject to final order by the Missouri PSC. For rates effective from April 01, 2015 through today we received a total of 82.8 million in additional annualized revenues from general rate cases, infrastructure charges and step increases, including yesterday’s approval of our DSIC filing in Indiana of 3 million. More information is included in the footnotes on this slide. Slide 19, highlights our continued strong financial performance. During the first quarter of 2016, we made total capital investments of 236 million, primarily for regulated system investments mainly replacement and renewal of transmission and distribution infrastructure. We expect capital expenditures to be at a 1.3 billion to 1.4 billion range for 2016, included in this range is our agreement to purchase the wastewater system from Scranton Sewer Authority. We’re seeking to close this by September 30, 2016 once the necessary approvals are obtained. The purchase price of 195 million includes cash of approximately 38 million and is subject to purchase price adjustments. As part of the acquisition, we have assumed the obligations to comply with the consent decree from the EPA and the Pennsylvania Department of Environmental Protection requiring system upgrades of 140 million over 10 years, providing future capital growth potential. For the first quarter 2016 cash flow from operations increased 49 million or 24.7% to about 247 million, mainly due to stronger collection of accounts receivable and the timing of unbilled revenues. Our adjusted return on equity for the past 12 months was 9.41% an increase of 53 basis points compared to last year from continued execution of our strategies. We also announced in April a $0.375 common stock dividend payable on June 01, 2016 to stockholders of record as of May 09, 2016. This represents a 10.3% increase over the previous dividend. Turning to Slide 20, let me discuss our earnings guidance. The headwinds we are currently facing in our market based businesses fall within the key variables of the earnings guidance range we shared with you at our Investor Day in December of last year. In addition, we are taking appropriate measures to mitigate some of these headwinds. As such, we are affirming our earnings guidance for the year in the range of 2.75 to 2.85 per share. And with that I'll turn it back over to Susan.

Thanks, Linda. Before we move on to Q&A I do want to mention that we were honored to be named to the S&P 500 on March the 04th. We're proud to be the only water utility in the S&P 500 as well as in the Dow Jones utility average which we joined in 2015. Additionally, in recognition of our environmental and sustainability leadership, we are also very pleased to be part of the Dow Jones sustainability index. To be named to the S&P 500 is a direct reflection of our employees’ commitment to deliver clean, safe, reliable and affordable water to customers every day. Our employees put our customers first. This results in a more positive constructive relationship with both customers and regulators. When regulators can trust our efforts to serve customers efficiently and effectively, they have confidence in our ability to invest productively in our water systems. Investing more in our water systems gives us more reliable service, better satisfied customers and growth. If this virtuous cycle that begins and ends with the employee customer relationship, the successful execution of this equation is what drives our performance. The actions of our employees every day are the reason American Water is part of the S&P 500, the Dow Jones utility average and the Dow Jones sustainability index and I am proud to be part of their team. And with that we're happy to take any questions you have got.

Ladies and gentlemen, at this time we will begin the question-and-answer session [Operator Instructions] Our first question today comes from Walter Liptak from Seaport Global. Please go ahead with your question.

I want to ask about the market based businesses and specifically Keystone, it looks like market base was nicely profitable this quarter and so I assume that the Keystone was profitable as well but I wonder, what is it about the rest of the year that brings it down to breakeven?

Well, actually if you look at the charts Walter and Linda mentioned that in the first quarter we had a $1 million loss at Keystone that starting the 1st of March, they have taken on several austerity measures to get back to the earnings neutral and cash flow positive for the rest of the year. So actually we're mitigating what happened in the first quarter and moving to earnings neutral for Keystone. On AWE we basically, if you look at the chart that Linda ended with, it’s within the realm of plus and minus as we look last year at Investor Day and projected the growth of AWE. So, it's -- the business is running well also Linda mentioned if you look at AWE being year-over-year quarter being flat, we did accelerate some of the homeowner services marketing cost because we have a system implementation in July and we didn't want to have marketing materials and what we tend to get our extra calls during a period of time when we were doing that. So actually, we're pretty much on our plan as we've looked at AWE and Keystone based on the actions that we've taken in the first quarter.

Okay, that sounds good.

Walter I -- this is Linda and I'll add to that, that in terms of the military services group for the quarter we were slightly up on a year-over-year basis but we do see headwinds associated with the capital future upgrades for the remainder of the year based on the military service or the Department of Defense budget.

But just going back to Keystone, $1 million loss doesn't sound bad considering the deep depression that the energy sector is in and it's great to be able to get it back to breakeven and I guess, there seems like there is a lot more consolidation opportunity in this business as some of the providers go into distress or market share gains as you called out. I wonder, if you could provide us with a little bit of outlook about any potential M&A or market share gains that I'm sure you're seeing as a very strong player in that energy business?

Right, Walter. So let me talk about the water services providers first because Keystone and we mentioned they had about 20% of the market share when we bought them and due to being affiliated with American Water not owned by a competitor E&P company, we did start seeing market share grow up to now close to 30%, we picked up several new large customers this year. So while the market has gone down from an E&P, our share of that market for water services has gone up, just like the industry experts EIA are basically targeting fall to see the supply numbers based on some projections for the summer going down and having to increase production, we see the same thing based on our discussions with our customers. So -- but we're very conservative in our outlook and our projections, so as Linda mentioned in her script, we're assuming no increase in production through the year and looking at cost controls for Keystone that include about that 80% of our cost can be variable, we're looking at a lot of process improvements, we continue to grow market share. And you're exactly right we're seeing some of the smaller water services providers who simply can't make it through this year, it's very difficult when you don't have a strong of a balance sheet as we do not have a growing customer segment for those water services. So our Keystone management team has done an outstanding job as you noted in a time like this with a market like this to get us to the position we're in and we're very proud of them.

Our next question comes from Richard Verdi from Ladenburg Thalmann. Please go ahead with your question.

I kind of wanted to follow up on the first caller’s inquiry pertaining you had two questions here with first pertaining to the Keystone side. I am just curious are you guys seeing any sort of or maybe customer bankruptcies on the horizon or having to enforce any of those take-or-pay contracts or what's the sense of that customer base because when I look at some of the other companies that are somewhat similar you're seeing that happen?

Yes, well first of all when we bought Keystone. They did not invest in a lot of pipeline those are relatively new for the future of building pipelines and we're ensuring there are strong third party creditors the credit worthy partners there. So don't really have the take-or-pay exposure now so that's good, but you're right what we're seeing and you all read the papers everyday you have bankruptcies as some of the smaller E&Ps and you're seeing a consolidation in the oil and gas industry. And let me remind you that in the Marcellus and Utica the Appalachian basin basically all of our support is for nature gas, it is not for oil. And we are also seeing to that effect the consolidation of the oil and gas companies we’re also seeing that they want credit worthy partners so to have a larger water services backed by a company like American Water is very attractive to some of our partners. Also keep in mind that you have to build an infrastructure for water before you need it or before you actually start producing natural gas. So we're seeing some interest express later in the year to start some projects.

And then continuing on the non-regulated side, you guys want to keep it somewhat of the smaller portion compared to the overall consolidated company but obviously with the water theme and the prowess of American Water that regulated side is going to at least in our view meaningfully grow over the next 5 to 10 years. And so that needs are going to probably have to grow the non-regulated side to keep it consistent with its time percentage of overall sales. And so what is the internal thinking of let's say over the next 5 to 10 years for the non-regulated side where American Water might dive into that is still the core water competency but expands that non-regulated side or do we tend to grow what we have in the portfolio right now?

Well Rich that's a good question. First of all let me tell you that dealing with faster regulated growth is a problem that we sincerely hope that we have, and as we said that 15% to 20% that's more of a limitation not a target, so if the regulated business, if we see that through things that are happening nationally that there is an acceleration in the number of governmental entities that want to sell their water and wastewater. And people have been saying this for a long time, we see it very steady, legislation helps, if that happens it doesn't mean we necessarily must ensure that market base is 15% to 20%, it's more of a limiter that from a risk profile standpoint. It will not be more than that. That does not mean it has to be that percentage, so I'll say that upfront. Now in terms of growing the business, so we believe at American Water that there is enough opportunity related very tightly to our core competency that we like to keep our growth engines related pre-directly to water and wastewater. So I will tell you that as we look at our businesses and market base, we are looking at of course our homeowner services, military contract, we look at any potential new business and say does this really play off our competencies because our market based business benefit because of the tremendous amount of expertise in our regulated business. It also helps our regulated business by bringing in a lot of competitive entrepreneurial type ways to look at things. So we think it's a very healthy relationship. We go through a very disciplined process to look at new businesses. Just as one example and this is public, we're very excited about the pilot project we did on geothermal on Long Island at a school where geothermal has been around for decades but it is always utilized ground as the heat transfer agent. And you have to have pipes for example if they are vertical 250 feet in the ground or horizontally, you need a lot of land. We're basically using our water main system to be the agent and it's not having effects on the water and it’s able to heat and cool building through geothermal system. While we know that our military bases is another cross connection between our businesses, several of our military bases or all of them are under a eventually a net zero charge from an energy standpoint, this type of technology can save 30%, 40%, 50% on energy cost, so we’re looking at those areas that we have expertise, that we are aligned with that have really good applications, as we look at different ways to grow in the market based business.

And then my next question pertains to the metering side of things. Obviously smart metering is an initiative that American has pursuing and I’m wondering if there is a possibility where instead of building out some of the infrastructure that would be required for smart metering if you've ever thought if American, I should say has ever thought about sharing the same infrastructure with the electricity companies to save on costs?

Well actually it’s interesting, you bring that up, we actually are doing some sharing in two locations in the Monterey Peninsula where of course we have the conservation measures and drought we have a pilot in Monterey that we are partnering Pacific Gas & Electric to use their backhaul system use water meters, smart water meters, use their backhaul system to actually look at the data. We just announced about two months ago, that we’re partnering with Commonwealth Edison ComEd we serve parts of metro Chicago and we are actually partnering with them to utilize a different type of smart meter technology, to again utilize some of their backhaul infrastructure, how this is a win-win, is that in our business as we’ve said one of the strong parts of our investment thesis, is that we have years and years of capital investment we need to make, because of the system nationally the water and wastewater infrastructure system, so for or us to say, we’ll put in the meters and the electricity company may already have some backhaul capability there from their smart meters, then where we can partner and utilize some of that infrastructure, it’s great for customers and the regulators love it, because it shows directly a reduction in the amount of cost for customers, it benefits the electric utility and it benefits us because if we are not building the backhaul, we just put that money into more pipes, plants and pumps replacements.

And this is -- yes this is Walter, these are two great examples but our AMI strategy we are looking further opportunities across our footprint, because as Susan said the benefits to our customers are huge and that is what we want to drive in the business.

[Operator Instructions] Our next question comes from Jonathan Reeder from Wells Fargo. Please go ahead with your question.

So in terms of the 2016 guidance, you mentioned the non-regulated weakness, expectations for the reminder year, are regulated and parent segments are either those doing better or they just kind of tracking in line thus far?

So Jonathan, this is Linda and what we did at the Analyst Day was we set forth some of the key variables that we expect in our earnings guidance range for the year and so we have reiterated that chart here, when we look at 2016, we are square within those variables based on what we know today in the first quarter results.

And then in terms of 2017 are you expecting Keystone to turn a profit or is it just too early to tell?

For keystone we’re expecting that they will take austerity measures and that they will be earnings neutral this year.

Right and for 2017, are these austerity measures things that are going to continue over?

It is too early tell Jonathan, I think, we look at our five year plan, we continue to see that the market expectations are about the same as they were in December, over the long-term and so we continue to believe in about 1% growth from the Keystone at this time.

Okay. And then I don’t know if you can provide any more detail on the military base RFP comments, are you seeing more bases, I guess being put up for grabs than you expected and do you expect any 50 year contracts, are close to being awarded something we might see later this year?

No Jonathan, we’re seeing quite a tick up in activity in the pipeline of Request for Proposals we currently, the Department of Defense has about 9 Proposals that are our right now, and that we’re active in, and also Jonathan interestingly for the military bases in terms of the capital upgrade, one of the areas that has not been really identified in the past, has been area of storm water, it’s been water and wastewater and so, the legislation, we believe allows the military bases to utilize us for the storm water services, but there has been a question about clarification. And I’ll tell you that there has been, out of for example the House Armed Services Committee as well as some of the Senates they said this was intended so we are working to get clarifying language so that on the bases we serve, we would have an additional opportunity to help them address their needs from a storm water standpoint. So we see that as a potential opportunity in the future.

Okay and that would just come in the form of additional I guess capital upgrades?

Yes that’s correct.

And then now just turning quickly to the regulated, West Virginia, I know that, it was somewhat in a state of disarray but now in light of kind of your rate case outcome and the pending infrastructure mechanism, can you just update how you're thinking about that state as a core operation that you want to stay in?

Yes, Jonathan, Walter we think we got a fair rate case order of the commission, we will work them to address customer issues in the states like we're anywhere else. And we feel positive about the future in West Virginia, the infrastructure mechanism that we just proposed last week is a positive step forward and it's can allow us to continue to invest and invest more into the infrastructure in West Virginia. So, it's a positive for us and for our customers.

Okay. Great and then last question on the California desal plant, the one you are delayed does that have any impact on kind of projected total company CapEx or I know, it wasn't a huge amount so I am assuming you are just planning on kind of backfilling that CapEx with other investments, is that accurate?

Yes, that's accurate, Jonathan. I mean it's a big plant but within our capital program it's not significant. So, it's all going to be within the same four to five year period.

Right, so you will some of the dollars shifting from year-to-year but it's still within that five year capital plan.

Okay. And then I guess even with that shift, I mean the one year shift, so you can offset like half the supply you're talking about some mitigating measures you're taking, I mean, isn’t there just an issue with I guess to having adequate supply for those customers, I mean, what you have to do to get the other half of the supply in the interim?

Yes we're going to have to build the facility and again the facility is going to be delayed for about a year, and we're working with the commission to mitigate that by moving these other components forward, but right now we're looking at probably starting construction in mid to late 2018.

Yes, Jonathan, to that point if you remember, Walter mentioned there were two which were the groundwater replenishment which is recycled water as well as the ability to do additional reservoir storage for half. The other half that we're working hand in glove with the local officials there as well as during a hearing in Monterey the Public Utilities Commission because of the delay have said that they also would advocate for us to have an extension of the Carmel River withdrawal kind of it was supposed to seize as you know into this year.

Yes.

To extend that until we can get the desal part built and in fact it was very positive that we could continue and work on these other components for half of it, before we actually build desal plant for the other half. So it actually ensures we build part of the project earlier and then hopefully get a, with everybody supporting the communities and the sate then get the extension on the water permit for the Carmel River.

Okay. So there is some flexibility from the requirements. Okay, great. Thank you so much for the time.

[Operator Instructions] And we do have a follow up from Richard Verdi from Ladenburg Thalmann. Please go ahead with your follow up.

I wanted to jump out but I had one other question, I asked this at Aqua yesterday and I'm just curious what American's take is, so maybe at the end of March, very early April, I had a conversation with one of the most prominent leaders at Nasupa he was telling me that the consumer advocates are looking to meaningfully push back on the DSIC because basically they feel it's being abused, they think that you file a DSIC and then there's another DSIC and it's just basically one after the next, and so I had asked Aqua yesterday if they were seeing that I'm wondering if you guys are seeing that at all and if you are, how American tends to deal with it?

Sure, well I'll tell you, I won't talk in general about NASUCA but in each of our state we try to work very closely with the consumer advocates’ office upfront, when we're filing this mechanisms, we try to ensure and I'll tell you we're very transparent about the process, this is also goes back to why our ability to not only increase and improve our O&M efficiency, but we have a lot of projects on how we also increased our capital efficiency, what are we doing to ensure that every dollar we spend, is being spent at the highest level of productivity. So, it's a one on one thing, it's not with the general NASUCA but in each of our state, our state Presidents’, our staff sit with the consumer advocates and basically walk through very openly what we need to do, why we need to do it and what we're doing to mitigate the cost. And I'll tell you when we go in for DSIC and capital infrastructure, we say this and I know some of you think we say it too much but I don't think it can be said enough. The ability to manage our O&M cost. So that for every dollar of O&M saved, we can put $6 of capital in the ground, when you hear like what Walter said is in West Virginia over four years or three and a half years we've reduced O&M cost 1.1 million, we filed in Illinois, we've reduced our O&M cost by 3%. The ability to show that we're being good stewards of the customers’ dollar goes a long way.

And if I may you had mentioned about how each one of your employees that runs the state, I got to say, and you might be happy this, I can see that because Jim Jenkins is hard at work for you guys. I just wanted to let you know he's doing a great job in my view. So thank you for the time Susan I appreciate it.

Thank you, Rich and thanks for the comments about Jim. He is doing extraordinary and I'll tell you that the team we have got I can go down a list and talk about the amazing people we've got. And we all just feel fortunate to work with them. Thank you, Rich.

And at this time we've reached the end of the question-and-answer session. I would like to turn the conference call back over to management for any closing remarks.

Thank you, Jamie. I will be short. I appreciate everybody participating in our call today. If you have got any questions as always you can call Greg and Melissa and they will be happy to help you. I will remind you that we're having our Annual Stockholders Meeting on Friday, May the 13th, in Voorhees, that will be lucky Friday May the 13th. Thanks again for participating in our call and we look forward to talking with you all later.

Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.