H2O America (HTO) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the SJW Group's First Quarter 2020 Financial Results Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker for today, Mr. Jim Lynch, Chief Financial Officer. Thank you. Please go ahead.

Thank you, Operator. Welcome to the First Quarter 2020 Financial Results Conference Call for SJW Group. I will be presenting today with Eric Thornburg, Chairman of the Board, President and Chief Executive Officer. For those who would like to follow along, slides accompanying our remarks are available on our website at www.sjwgroup.com. Before 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 to our most recent forms 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission, copies of which may be obtained on our website. All forward-looking statements are made as of today, and 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 archived of -- and an archive of the webcast will be available until July 27, 2020. You can access the press release and the website -- the webcast at our corporate website. I will now turn the call over to Eric.

Thank you, Jim. Welcome, everyone, and thank you for joining us. I'm Eric Thornburg, and it is my honor to serve as Chairman, President and CEO of SJW Group. I would like to start by thanking all of our nation's essential workers who are bravely serving us on the front lines during this extraordinary time. Our public safety employees consisting of police, fire, emergency response and health care professionals, all deserve our recognition and appreciation for their dedicated service. In addition, we should not forget about those working in our grocery stores and other critical supply chain employees who are potentially risking their personal safety to deliver essential services. SJW Group and its subsidiaries are keenly aware of and readily accept our public health responsibility to protect our employees, customers and communities during this COVID-19 crisis. We have over 700 passionate and dedicated water professionals who are unified in their shared commitment to deliver on our public health mission during this pandemic, the continued delivery of safe and reliable water service. I'm incredibly proud and honored to serve alongside all 726 of them. Our response throughout this event has been and will be guided by this fundamental principle, protect our people, protect public health and protect our brand, doing what is right and at harmony with our core values: integrity, respect, service, compassion, trust, transparency and teamwork. Our number one priority as we respond continues to be the health and safety of our employees as we carry out our critical role in delivering life-sustaining safe water service. We limited our team's work to mission-critical activities, such as conducting emergency repairs, water quality monitoring, and operating our water treatment facilities under additional safety guidelines recommended by the Centers for Disease Control, our local health departments and our company health and safety experts. As additional guidance becomes available from state officials and health agencies, we're evaluating additional functions, including delivery of our capital projects to determine when those may be safely resumed. Our responsibility to protect public health during this crisis is clear, and we will continue to monitor developments and respond as necessary through our national as well as local emergency operation centers to protect our employees, our customers and communities. Earlier this year, we provided earnings guidance for the first time in our history as a public company. We did so in order to provide investors with a clear sense of the underlying strength of our company, having just completed a transformative combination with CTWS. The worldwide events we've experienced since then could not have been foreseen at the time the guidance was given. There is much we do not yet fully know in regards to the pandemic and its possible longer-term impacts on our nation's economy. Rather, I thought I could candidly outline the sensitivities we see in regards to the possible impacts from COVID-19 as well as weather-related challenges on the guidance we previously provided for 2020. The current global COVID-19 pandemic is affecting our national and local economies due to mandatory orders limiting business and social activities to help protect public safety. To the extent business customers and our service communities are closed or residential customers experience a loss of income during this event, it may affect water usage, customers' ability to make timely payments for water service and, ultimately, our operating revenues. At the same time, state regulators have mandated customer protections, including a moratorium on shut offs for nonpayment and waiver of certain late payment fees that may affect our cash flow. However, our regulators also recognize the critical role our water utilities play and that our companies will incur additional operating expenses related to COVID-19. From remote work arrangements, additional equipment, goods and services necessary to maintain the safety of our people and facilities, anticipated increases in uncollectible accounts and the pause in construction work, we anticipate COVID-19 will negatively impact our 2020 business plan and financial performance. With the exception of Maine, all of our operating subsidiaries have been provided regulatory tools to deal with the pandemic's financial impacts. San Jose Water has activated its catastrophic event memorandum account to track incremental costs such as bad debt, waived connection fees and deposits and usage declines from authorized levels. Connecticut Water has a water revenue adjustment mechanism to allow recovery of authorized revenues for water usage and has established a regulatory asset account to track costs incurred and revenues lost as a result of COVID-19 related regulatory orders. SJWTX established a regulatory asset account to track expenses, including nonpayment and late fees. And I am also confident that the main Public Utilities Commission will be fair and reasonable in evaluating the impact on our operations there. Through the end of Q1, despite thousands of closed businesses, we have not yet seen a material financial impact from COVID-19 related events on SJW Group. We continue to closely track our operating results and are working with our peers and local and national industry associations to raise attention to the industry impacts and advocate for further regulatory relief. Yet still, there is much we do not know. We do know that every $1 million of increased cost for whatever reason would have an earnings impact of $0.035 per share. These variables certainly present challenges. However, as we are now part of a larger combined organization, we have the added benefit of weather, economic and regulatory diversity that comes from operating in 4 states to help mitigate some of the risks. Where there is a greater clarity is with our water supplies in California. With the rainfall season largely behind us, and because of the lower-than-normal precipitation experienced locally and thereby impacting available surface water supplies in our watershed, we anticipate significant increases in our operating costs through the reliance on purchased water from our wholesaler to meet our customers' needs in 2020. Every 1 billion gallons of purchased water has an incremental cost of $4.2 million more than using our own supply sources. As a direct result of the water supply outlook and in full transparency, we are revising the previously announced guidance of $2.25 to $2.35 per share to $1.95 to $2.05 per share in 2020. The This graph shows how impactful the weather has been on our 2020 surface water supply as compared to 2019. With no further significant precipitation anticipated in Q2, we expect a $0.30 reduction to earnings per share and have revised our guidance accordingly. On a positive note, this graph shows our California demand ahead of last year and ahead of the 5-year average. This bodes well as we head into the peak usage months ahead. Any further revision to this guidance as a result of the pandemic will be communicated in the normal course of our disclosure. Given that we're only 6 weeks into this shelter-in-place way of life, it is difficult at this juncture to fully quantify the financial impacts of COVID-19. What we can say is that we have high-quality water systems throughout our service areas and are investing in them to benefit customers, communities and shareholders. The prudent management of our business and financial resources continues to be fundamental to our growth and our ability to return capital to shareholders. We are proud to have continuously paid a dividend for over 76 years and to have increased that annual dividend in each of the last 53 years, delivering value to our shareholders. I will now turn the call over to Jim, who will review our Q1 financial results. After Jim's remarks, I will address regulatory and other business matters. Jim?

Thank you, Eric. Our operating results reflect the first full quarter of combined operations with Connecticut Water Service, Inc., or CTWS, an increase in customer usage and new revenues authorized in our California 2019 general rate case. In addition, as Eric mentioned, we experienced a decrease in the availability of surface water supplies due to dry weather conditions in our California service area. The impact of COVID-19 was not significant to first quarter operating results, but could have a greater impact during the remainder of the year. First quarter revenue was $115.8 million or a 49% increase over the first quarter of 2019. Net income for the quarter was $2.4 million or $0.08 per diluted share. This compares with $5.9 million or $0.21 diluted earnings per share for the first quarter of 2019. Diluted earnings per share reflects the change in our earnings pattern that resulted from the CTWS transaction. Interest on debt and the impact of new shares issued to finance the transaction is recognized evenly throughout the year. On the other hand, earnings from Connecticut and Maine will principally follow a seasonal pattern. As a result, as we move forward, we expect to see lower earnings during the fall and winter months when cooler temperatures and increased rainfall typically occurs and higher earnings in the spring and summer months when warmer, dry weather and higher seasonal demands typically occur. The change in diluted earnings per share for the quarter was primarily attributable to an increase in customer usage in California and Texas of $0.18 per share, CTWS results of $0.15 per share, rate increases in California and Texas of $0.09 per share and a savings in merger-related costs of $0.07 per share. These increases were offset by interest expense on new long-term debt of $0.22 per share, a decrease in California surface water production of $0.16 per share, increased production costs due to higher customer usage in California and Texas of $0.16 per share and an increase in California and Texas general and administrative expenses of $0.08 per share. In addition, in 2019, $0.05 per share of interest income was earned on invested proceeds from our December 2018 equity offering. No similar income was earned in 2020. The revenue increase was the result of $27.4 million in new revenue as a result of the CTWS merger, $6 million in higher customer usage and $3.5 million in cumulative rate increases, primarily the result of the 2.28% California general rate case increase implemented on January 1, 2020. In addition, we experienced a $1.1 million increase related to net changes in our California balancing and memorandum accounts. Total 2020 first quarter water production costs were 26% higher than the first quarter of 2019. The higher water production expenses were primarily due to $6.3 million in new CTWS expenses, $5.4 million from a decrease in the amount of lower surface -- lower cost surface water produced in our Northern California watershed and $5.3 million in higher customer usage along with $1.5 million in higher per unit cost for purchased water, groundwater and power. These increases were partially offset by a $1.5 million decrease in California's cost recovery balancing and memorandum accounts. Heading into 2020, we anticipated producing approximately 3.5 billion gallons of surface water from our Northern California watershed, which is representative of our 10-year average surface water production. However, through the first 2020 first quarter, when the majority of watershed precipitation occurs, we experienced the second lowest rainfall level since 2011. Absent additional rainfall, we anticipate 2020 surface water production will be between 1 billion and 1.2 billion gallons. While we believe existing treated and groundwater supplies in our California service territory are sufficient to meet 2020 customer demand, the incremental cost to replace the surface water with purchased imported or groundwater is approximately 4.2 million per billion gallons. Other operating expenses increased $18 million or 28% for the quarter primarily due to $9.2 million in higher general and administrative expenses, including $6.4 million in new CTWS general and administrative expenses. Other first quarter expense changes included $6.2 million in higher depreciation related to utility plant additions, $3.3 million in higher property and other non-income taxes and $1.8 million in higher maintenance expenses. The increases were primarily a result of the inclusion of CTWS first quarter activities. Finally, merger-related expenses decreased by $2.2 million quarter-over-quarter. Other income and expense in 2020 included $4.1 million in interest expense on SJW Group's senior notes issued in October of 2019 and $858,000 of interest expense from San Jose Water's $80 million senior notes issued in March of 2019. In addition, in 2019, we recorded $1.8 million of interest income on invested equity proceeds. And again, no similar income was earned in 2020. Turning to our capital expenditure program. We added $38.3 million in company-funded utility plant during the quarter. This represents 17% of our total 2020 planned capital expenditures. From a financing perspective, first quarter 2020 cash flows from operations decreased 49% for the first quarter of 2019. This change was primarily the result of a $13.1 million decrease in the collection of balancing and memorandum accounts and a $9.2 million increase in payments of amounts previously invoiced and accrued, partially offset by a $5.1 million increase in interest accruals for new debt issued and debt acquired in the merger with CTWS and a $4.9 million increase in net income adjusted for noncash items. In March 2020, Connecticut Water Company issued $35 million in unsecured senior notes with a 30-year life at 3.51%. Proceeds from the note issuance were used to refinance outstanding balances on the Connecticut Water Company bank line of credit. At the end of the first quarter, we had $103.6 million available on our bank credit lines for short-term financing of utility plant additions and operating activities. The average borrowing rate on the line of credit advances during the quarter was 2.91%. With that, I will stop and turn the call back over to Eric.

Thank you, Jim. While there are clearly challenges resulting from a pandemic that is affecting all businesses, 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. Our capital programs continue to be the company's earnings engine, adding rate base and ensuring resilient water systems. We are complying with the shelter-in-place orders and moratoriums on business activities and have temporarily paused our construction programs in all states, except Texas. We are now evaluating when and how those may resume to deliver that work in 2020. In California, we still anticipate completing the $320 million in investments authorized in our current general rate case decision by the end of 2020. We're currently ahead of schedule, owing to the advanced performance of construction projects in 2018, 2019 and the first 2.5 months of 2020. In Connecticut and Maine, we anticipate minor impacts as the construction season does not fully get underway until April or may due to weather. In Texas, business continues as usual. There is no moratorium on construction activities. Future capital improvements will be proposed in several important upcoming regulatory filings planned across our states, including Connecticut Water's first general rate case since 2010, Maine Water's Camden/Rockport division's general rate case and San Jose Water's general rate case for new rates in 2022 through 2024. Other regulatory developments in Q1 include: the approval of Connecticut Water's WICA charge effective April 1, 2020, resulting in incremental annual revenue of $2.2 million; the conclusion of the California PUC's review of San Jose Water's past billing practice for service charge changes. The company is currently providing refunds to customers totaling approximately $2.1 million. San Jose Water is also planning for $5 million in new capital investments into its water system in accordance with the settlement agreement. And an order correcting an error on San Jose Water's current GRC decision was received, allowing a company to file for the recovery of $1.2 million balance in its pressure reducing valve modernization and energy recovery memorandum account. A final decision on the recovery is anticipated in Q3. As Jim mentioned, we are very closely tracking revenue impacts resulting from a pandemic and adjusting our business operations to mitigate them. A key metric will be any difference between actual versus authorized usage, and we're monitoring both residential and business usage. While it is too early to determine the full usage impact, Connecticut Water has the protection of the statutory water revenue adjustment mechanism. And for Maine Water and SJWTX, the revenue mix enjoyed by these companies of approximately 80% to 85% residential and public fire, and 15% to 20% from business, provides strong revenue protection. And while San Jose Water's revenue mix is approximately 60% residential and 40% business, its Q1 actual usage is tracking quite nicely with authorized usage. I would also point out that apartment complexes are part of the business revenue class, so that may well provide a hedge here as people work from home during this challenge. Furthermore, San Jose Water's current GRC decision allowed for greater cost recovery from the fixed charge, allowing higher revenue stability overall. In the 153-year history of our company and its people, we had endured many natural disasters: droughts, floods, tornadoes, hurricanes, ice storms, extended power losses, fires and earthquakes. And we have served our customers and communities throughout times of crisis, including economic hardships, terrorist attacks and even wars, all incredibly difficult challenges that we have met head on and overcome. Looking ahead, we are preparing for a return to full operations in the next few months. This includes evaluating our capital projects mix and coordinating with our construction partners to quickly ramp up construction activities once clearance is provided. We are also developing a risk-based process for returning our employees to work that will adhere to the safety guidelines provided by our national and local health authorities. Whatever the new normal may look like, our goal remains the same: to deliver on our public health mission as a water service provider and protect our employees, customers and communities. I'm incredibly proud of all of our employee teams and their commitment to serving our customers and communities, and I'm confident that we will emerge from this crisis a stronger and more resilient company at every level within the organization. I want to sincerely thank the Board of Directors for your leadership and support. We truly have an outstanding Board with a diverse array of talent, experience, technical knowledge, wisdom and even geography that will serve stockholders, customers and employees alike. They have exemplified the values of our organization and provided the right balance of support and challenge to our leadership team. Key additions to the Board include Carol Wallace, Heather Hunt and Mary Ann Hanley to the SJW Group Board, having been elected by stockholders in 2020. All 3 have served on the Board since October 2019, with the close of our historic combination with CTWS and have been fantastic Board additions. Finally, I would like to thank Doug King for his service to the company. Doug has served as a Director of the company since 2003. Doug is a brilliant individual and his contribution to our company and stockholders is hard to measure. He is a key part of our history, chairing the Audit committee for many years. We wish him the very best. And with that, I would like to turn the call back to the operator for questions.

[Operator Instructions]. You have a question from the line of Hasan Doza with WAM.

Just three questions. Eric, your quantification of the cost to earnings was very helpful, as you mentioned, $1 million of costs, about $0.03 of earnings. My question is, either for you or Jim, if you are able to establish this memo account, the CMA memo account, when you have these incremental COVID costs that fall into the CMA memo account, are you able to defer those costs from hitting the P&L? Mechanically, how would it work?

Jim, would you like to answer that question?

Sure. Sure. And thanks for the question, Hasan. Right now, it is a tracking mechanism. And the way that the tracking mechanism works is we capture the cost that are directly related to COVID-19 and as well as quantifiable revenue impacts. And then at a point in the future, we would submit the balance that has been tracked within the account to the commission, and I'm speaking specifically about California. The process may be a bit different in Connecticut and Maine and Texas. But generally speaking, it would follow the same sort of authorization procedure, where a review would be done on the cost. They would not be recognized by the company in terms of deferral at the time that they are incurred simply because the memorandum account is subject to further review by the regulatory authorities prior to our authorization to put them into rates.

Okay. And if I can ask one follow-up, Jim. In terms of the higher purchased water cost you highlighted, what is the process that you gentlemen are thinking for submitting to the CPUC for the recovery of the higher purchase cost? Maybe you can just help out in terms of the timing to submit for the approval of the higher $10 million cost and the time frame for the supply line.

Jim, why don't I start with that? And then maybe you could supplement that -- supplement my answer there. Thanks, Hasan. Yes, appreciate your question. And when you look around California, some of the other Class A utilities have a modified balancing account memorandum for purchased water both price and quantity, but it's connected directly to a revenue adjustment mechanism. We're evaluating, and we've applied in the past for revenue adjustment mechanism and we're not successful in receiving that. So what we will do is look at this very carefully and look at history, and in our next general rate filing, make the determination as to whether we ought to apply for a water supply cost balancing account that would include quantity, not just price. And as our current thinking is, that's attractive to us because it kind of de-risks on the downside. But on the other side, would flow back to customers if we had a lot of water that we can treat ourselves. So we think that would work for customers quite well. But we want to make sure we get it right. And I would say, of course, this is really a unique year and that the magnitude of it is quite significant. And when you look back in the past, we've not had gaps of this nature here for some time. So, Jim, anything I missed or you want to expand on?

No. I think that's the -- that is the answer, effectively. Right now, anything above what is included in rates is enjoyed by the shareholders. But when we don't produce the amount that is included in rates, that's borne by the shareholders. So there is an element of risk associated with the current construct. And as Eric mentioned, this is one of the -- in the last 10 years, one of the driest periods of time we've experienced up in the Northern California watershed followed -- it follows, however, last year, which was one of the higher rainfall totals that we've experienced in that same watershed. So there was benefit -- shareholder benefit in the prior year and this year because of the lower rain, that is going to be something that the shareholders ultimately have to bear.

You have a question from the line of Durgesh Chopra with Evercore ISI.

I apologize, I actually joined late, but can you provide any color or quantifiable demand trends in your jurisdictions in California, Connecticut, et cetera?

Yes. We can -- Durgesh, thanks for participating in the call today and your question. And we did have a graph up there, and I'm not sure if John Tang can go back to that graph, but it shows kind of how we're tracking currently against the 5-year average. And we shared that right now through April, at least our system delivery or demand from our customers in California is about 13% ahead of the 5-year average. And so what we said was that we had not seen any revenue impact in the first quarter and that we were monitoring very carefully going forward. And I mentioned that we have 60% of our revenue in California comes from residential customers and 40% from our business customers, but that apartment complexes and condominium complexes in San Jose are classified as business in our revenue accounts. So there may actually be some hedge there, but we do have thousands of businesses that are, of course, closed like all communities. And so that's why we're watching it very, very closely. Jim, anything that I missed?

Yes. The only thing I'd add, Eric, is in Connecticut, we do have a decoupling mechanism of RAM, if you will, and that provides some downside protection in the event that we do see a decline in demand. So between the two service -- between the two largest service areas, we're continuing to monitor the activity and are confident and comfortable with where we are at this point.

I guess, I appreciate the year-to-date. Specifically, late April or the demand trends, I would -- are they similar to the year-to-date trends? Or are you seeing sort of some sort of moderation in demand in the month of April? I don't know if you can comment on that or not.

Jim, that graph that we put up, I think if you look at it, it would be fair to say it's widening away from the 5-year average, the further along we got into the April end period there. But I would caution how we look at that because it is so early in this event. And, of course, weather and irrigation drives that. So that may as well account for a portion of that. But at this point, while we have not seen any decline or deterioration in water demand in our customers in California, particularly.

Got it. Super helpful. And then, maybe, just a quick follow-up on the guidance. Eric, the guidance is -- has that solely been adjusted for the purchased water expense? Is that the sole change between the guidance provided at the beginning of the year and versus now? The reason why I ask is a lot of your peers on the electric gas utility side of things have talked about a material O&M savings as folks work remotely and in terms of mileage reimbursements and just travel costs and things like that. So I'm kind of curious if the guidance, you may be able to offset some of the pressure from purchased water costs from these savings.

Thanks, Durgesh. Yes, the adjustment is completely driven by the change in the sources of the water for our customers. So all of that's driven by having to purchase additional water. So we're -- having through the first quarter, Jim reported our revenues and expenses, and -- but we haven't had it closed yet in April. And so we'll be doing that, and we'll be able to judge if there are any savings benefits from the current posture. But we also have to track, of course, on collectibles and other expenses related to it. So net-net, we'll have to be watchful to see if there's any impact. If there is a beneficial impact, yes, then we could apply that towards the challenge that we have on the water supply or other challenges that arise during the year. But right now, the complete modification to our guidance is based on the changing profile in our water supply.

[Operator Instructions]. Your next question comes from the line of Jonathan Reeder with Wells Fargo.

Eric and Jim, I'm a little confused. Are you affirming your 2020 CapEx budget of like $225 million? Like, do you expect to make that up in, particularly, in California through the remainder of the year? Or does the pause in activity, is that going to cause you to come up short?

Thanks, Jonathan, for the question. Thanks for being here today. And so I'll start, and then I'll have Jim make any additional comments that are necessary. We are confident that we're going to hit the $320 million total for California. If you think about that, that was what was awarded in the last rate case. And that covers a 3-year period. So any change in the amount of CapEx for San Jose Water Company would shift into a future year, but we would still have -- we would still complete the construction necessary to deliver on the $320 million, which would allow for us to receive a third step increase in January of 2021. And the rest of the changes, while there might be some modest changes in period, but not in total. So for example, we've continued to work on the Saco River Plant project in Maine throughout this crisis because it's just really getting started at site work. But that's a two year plus project. So if we're a little shorter this year, it will be longer next year. So within a rate cycle for each of our jurisdictions, it would be the same amount.

Okay. So we might think of maybe this year is a little lighter because, I mean, you're already spending ahead of that $320 million in a request. But the 5-year budget that you laid out, the $1.2 billion or so, that's probably still achievable by making it up in future periods?

Yes. That's exactly right, Jonathan. I don't see any of our projects being canceled as a result of this. Well, let me say this. I'll give you an example. There's a water main replacement project in Connecticut that's in front of a hospital, and that was scheduled for this summer. So our President there is reprioritizing the pipe replacement projects. And obviously, not going to go after that one because of potential implications for continuity of service at the hospital. But then moving forward, a lower priority, relatively lower priority project, to fill that space that's opened up by the delay of that other project. So that's the approach we're taking. We're not reducing, but it's more rescheduling.

Okay. And then I think in the Q1 at least, I may have missed it because I got through to the call late too, but I think you booked like a $0.02 reserve related to COVID-19. What exactly did that relate to? And is that included in the new guidance range? Or is that an excluded item?

Yes. I'll tackle it. Jim, help as well. The $0.02 is related to rising uncollectibles over 90-day accounts. But it really, frankly, started a little before the COVID crisis. There had been a change in the termination procedures provided and allotted for by the California PUC, so we had seen an elevation in the over 90-day accounts. We did not include that in our revised guidance. We expect to make that up through our normal course of operations.

Yes. Eric, that's exactly right. The reserve is primarily tied to our aging. And at this point, predominantly notification requirements that actually were changing at the beginning of the year as necessarily opposed to what was the direct result of COVID-19.

Okay. And that's expected to be offset. So -- okay. And then I'm just kind of curious, the higher usage in California, does that actually help your margins right now? Or is it actually a net loss because of the incrementally higher cost to procure the purchase water to serve those sales? Like, would you actually be better off if usage was down?

Jim, you want to tackle that?

Yes. Sure. So clearly, when you take a look at the amount of purchased water that we would need to acquire to replace the surface water, it's going to impact the margins. And on an average basis, I think we -- as Eric mentioned, it costs about $4.2 million for each billion gallons we have to replace between our own sourced water and the acquired water. So that is going to reduce margins. And because we're tracking this not only compared to last year, but also compared to our budget. And it is below what we had budgeted and forecasted for the year. It will have an impact on the margin as we move forward.

Right. But would you be better off if sales were actually down, and therefore, you didn't have to buy this additional water, right? The cost of buying this higher cost water versus what's embedded in rates, is it actually causing you to lose money as opposed to just losing those sales? I'm not sure if I'm asking that correctly, but...

Yes. The answer is no. Clearly, whenever we get an increase in sales, it benefits us. The fact that we have repositioned the fixed and the volumetric fee in the rate structure to provide more stability in the rate structure means that there's less benefit when you go over the sale amount. But any incremental amount we do get to benefit from by way of sales, the cost of providing that is not more than the incremental benefit amount.

Okay. And then if I could, can I go back to one of your earlier questions about the MCBA, do you actually plan to file for that in the next rate case, without the kind of sister mechanism, the revenue mechanism? Because I know you guys have been denied getting both of those in place. Do you actually plan to file that? Or is that just something you're saying we're going to kick it around and see if it makes sense and if there's receptivity on the commission's part?

Jonathan, I wouldn't say that we've got a firm plan to definitely do it, but it's -- we're looking at it very hard. We're not just kicking it around because I would rather have some stability than having a theoretical upside every -- once every 10 years to grab hold of. So from my experience, having sort of a tracker with a -- maybe a band around the numbers so that you're not constantly adjusting it, but you're protecting customers on the extreme upside and the company on the downside, that makes for better long-term utilities. And I think -- I'd like to think the commission would be open to it. I know they've been sensitive to the RAM side because of the big balances that we're fortunate enough not to have, but others do. But obviously, this is a significant impact to our company and certainly something we want to take a really hard look at. And my bias would be to try to work with the commissions when we have things like this to provide more stability there. Jonathan, I know you've been very astute around water supply for our California operations. And I don't know when you came in, but we put up a graph, and you could look at it at your convenience. But you can see how flashy that watershed is in 2019 in the space of just a couple of weeks. We went from 450 million gallons to 2 billion gallons in that Elsman reservoir. And that's typical. It's, like I said, flashy. You've got steep canyons around that reservoir. And when you get some rain stuck up on that mountain, that thing fills quickly. So we were fully expecting to do a lot better than we ended up here and really didn't anticipate anything quite like this, where we're just 45% of last year and absolutely 0 rain in February, which is typically the highest month, but then started with a good March, but it really tailed off. So that's where we are.

Yes. No, I think you'd be well received from the investment community, eliminating that kind of extreme volatility, too, if you could get at least the MCBA side through. So I guess, got to kind of watch what's going on with the Cal Water rate case and those mechanisms there that, hopefully, the commentary is still positive around them. And then, I guess, my last question is just going to be the real estate segment. I know it's small, but haven't talked about it. Any impact whatsoever from this on -- I know it's small, but your tenants or leases there?

That's a great question, Jonathan. Jim, can you manage that for us?

Sure. So at this point, Jonathan, while the only real income-producing property we have where we have tenants is our Knoxville facility. And right now, many of the businesses within that facility are sheltering in place, but that's the extent of any significant change that's been brought about by the pandemic. We've not given any rent concessions at this point and not been asked to do so.

Okay. It appears that there are no additional questions. I will turn the conference back over to Mr. Eric Thornburg for any closing remarks.

Thank you, Operator. Folks, this is National Drinking Water Week. It's a time to reflect on the blessings we have with great water supplies and safe drinking water throughout the country. And boy, there's no more important time to be able to say that than right now with the -- when the simple act of being able to wash your hands is one of the key approaches to avoid any infection. So we really honor our water supply professionals, and I have to tell you that those at SJW Group are among the finest I've ever met. And it's a great organization, and we appreciate your interest in our company. And we'd ask you to join with us and celebrate National Drinking Water Week, and we look forward to speaking with you in the future. Thank you very much.