H2O America (HTO) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the SJW Corp. Third Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Suzy Papazian, Corporate Secretary. Please proceed.

Thanks, operator. Welcome to the third quarter 2013 financial results conference call for SJW Corp. Presenting today are Richard Roth, Chairman of the Board, President and Chief Executive Officer; and James Lynch, Chief Financial Officer. Before we begin today's presentation, I would like to remind you that yesterday's press release and this presentation may contain forward-looking statements. The statements are only projections and actual results may differ materially. For a description of factors that could cause actual results to be different from statements in the release and in this presentation, we refer you to the press release and to our most recent Form 10-K and 10-Q filed with the Securities and Exchange Commission. All forward-looking statements are made as of today and SJW Corp. disclaims any duty to update or revise such statements. You will have the opportunity to ask questions at the end of the presentation. As a reminder, this webcast will be available until January 27, 2014. You can access the release and the webcast at the corporate website, www.sjwcorp.com. I will now turn the call over to Rich.

Thank you, Suzy. Welcome, everyone, and thank you for joining us. On the call with me today are Jim Lynch, our Chief Financial Officer; and Palle Jensen, our Senior Vice President of Regulatory Affairs. As Jim will discuss in greater detail, SJW's financial performance in the third quarter suffered from the lack of a timely decision on our California general rate case. Notwithstanding regulatory delays and the challenges of operating without a general rate case, we have been able to continue to deliver solid financial results and excellent service. No one is more frustrated with the extended regulatory delays than I am. And I assure you, we are taking every reasonable and practical measure to effectively manage the situation. During this period of extended regulatory delay, San Jose Water Company has carefully managed its cost structure, while focusing on maximizing operating efficiencies and crudely deploying capital resources. When we have made substantial progress on our roughly $90 million, 2013 capital budget and are moving forward crisply with the $62 million of authorized improvements to our Montevina Water Treatment Plant, which we allow the company to maximize the use of low-cost, high-quality local surplus water supply. After nearly 3 years, the Texas Commission on Environmental Quality issued a final decision on our SJWTX general rate case. As I will discuss in more detail later, the decision was a mixed bag. And because it took 3 years to receive the decision, SJWTX has already submitted another general rate case application with the Texas Commission on Environmental Quality, which I will also discuss in greater detail later at my remarks. SJW Land Company's portfolio of investment properties, which is currently fully leased with high-quality tenants under long-term agreements is contributing to consolidated earnings and cash flow. I believe SJW's real estate holdings will, over the long haul, appreciate and result in increased shareholder value. I will now turn the call over to Jim, who will provide you with a detailed review and analysis on the third quarter results and other financial commentary. After Jim's remarks, I will provide additional information on our regulatory filings, water supplies and other key operational and business matters. Jim?

Thank you, Rich, and thank you to our listeners who are joining us today on our call. Revenue for the third quarter was $85 million, up $3 million or 3.4% compared to revenue in the third quarter of 2012. For the first 9 months of 2013, revenue was $210 million, up $11 million or 5.3% over the same period in 2012. The increase in quarterly revenue was primarily due to a $1.4 million increase in customer rates and the recognition of $2.3 million net from certain balance in the memorandum accounts. This increase is partially offset by a 1.5 million decline in customer usage. The higher rates were the result of a 9% water cost increase imposed by the Santa Clara Valley Water District, which has passed on to our customers through higher rates. The rate -- this rate increases partially offset by an expansion of our Water Rate Assistance Program or WRAP in California. WRAP cost are subject to balance and account treatment and we currently have an application before the California Public Utilities Commission to through-up the cost of this program. The increase in balance in the memorandum account includes income and expense amounts not yet approved in the rates, which we have determined are probable of future recovery or refund. And the decrease in customer demand was attributable to periods of cooler weather and a brief period of rain in our California service area. Year-to-date operating revenue increased primarily due to the recognition of balance in the memorandum accounts that netted to $4.9 million, rate increases of $4.1 million, and $1 million increase in revenue from new customers. Water production costs for the quarter were $40.4 million or an increase of $3.8 million over the third quarter of 2012. The change included the previously noted water cost increase by the district and lower surface water supplies in California. Our margin of operating revenue over production costs was $44.8 million or 53% compared to $45.7 million or 55% in 2012. Year-to-date water production costs included the impact of the district's increase and $1.6 million in increased customer usage, offset by an $820,000 cost reduction due to an increase in available service water. Our margin of revenue, over production cost year-to-date, was $118 million or 56% compared to $115 million or 58% year-to-date in 2012. Operating expenses, excluding water production costs, were $25.5 million in the third quarter compared to $24.9 million in the third quarter of 2012. The $600,000 increase consisted primarily of higher depreciation and property taxes related to new utility plant assets placed in service. Year-to-date, operating expenses, excluding water production costs, were $76 million compared to $74 million in 2012. In addition to higher depreciation and property taxes at $1.9 million, we experienced a minor increase in system maintenance expenses in the year-to-date period. Phenomenal increases in administrative and general and maintenance expenses reflect our continued focus on cost management while we await the decision in our California general rate case. Nonoperating income expenses in the third quarter of 2012 included a $910,000 gain on the sale of our Florida property. We experienced no similar sale in the third quarter of 2013. Year-to-date, nonoperating income and expenses included a $1.1 million gain on the sale of our Connecticut property that occurred in the first quarter of 2013. Net income for the quarter was $8.9 million, a decrease of $1.1 million or 11% compared to net income in the third quarter in 2012. And year-to-date, net income was $17.7 million, an increase of $1.3 million or 8% over the prior year, year-to-date results. Fully diluted earnings per share were $0.44 for the quarter compared to $0.53 for the same quarter in 2012. Year-to-date, fully diluted earnings per share were $0.89 compared to $0.87 in 2012. Recall that in April 2013, we issued 1.4 million shares of common stock that are included in our 2013 earnings per share calculations. As Rich mentioned, we continue to make progress on our $92 million capital expenditure plan for 2013. Through the 9 months ended September 30, we have completed and placed in service approximately $59 million of the plan and construction is in progress on another $27 million. Total utility plant in operation at the end of the third quarter was approximately $1.3 billion. With that, I would like to turn the call back over to Rich.

Thank you, Jim. The regulatory environment in California, Texas and much of the country remains challenging. The greatest challenge is, as it often is, regulatory delay not a deterioration of the regulatory compact. There have been no new developments regarding our California general rate case. As previously reported, new rates were supposed to go into effect on January 1, 2013. As of today, we have not received a proposed decision or regulatory communiques relating to the timing of the decision. In summary, I am unable to accurately estimate the timing of the proposed decision. The CPUC is, and has been for sometime, under constant scrutiny by the media, elected officials and the general public. This heightened scrutiny, we believe, is contributing to the significant regulatory delays experienced by all CPUC-regulated utilities. Nevertheless, we see positive signs as evidenced by the Montevina Water Treatment Plant decision. Like our pending general rate case application, the Montevina application was subject to extensive CPUC review. But in the end, we received our authorization to initiate a complete rebuild of the water treatment plant under reasonable terms and conditions. Into Montevina decision process is a proxy for our general rate case process, we have recently remain optimistic and while San Jose Water Company's general rate case decision will be late, it will be constructive. Furthermore, we believe we have submitted compelling evidence supporting the investments needed to continue to deliver high quality, safe, reliable and sustainable water service to San Jose Water Company's customers. Turning to Texas regulation. The Texas Commission on Environmental Quality issued a final order on August 21, 2013, on our general rate case filed in August of 2010. The order authorized its rates about 33% higher than the rates in effect before the filing, at about 4% lower than the interim rates in effect since October of 2010. Since the final rates are lower than the interim rates, SJWTX will issue customer refunds starting in November of this year. The refunds did not impact Q3 revenue and will not affect future revenue because the company previously made an allowance for such. While disappointing in several respects, the Texas decision contains a silver lining in the form of a rate base determination of about $38 million. A rate base determination removes significant uncertainty from future rate filings about the value at regulatory treatment of the assets acquired from the water supplier corporation in 2006, and additional investments in the system. Additionally, a rate base determination should simplify and expedite future SJWTX rate filings. It is important to note that on October 2, 2013, SJWTX filed a new general rate case application seeking a 23% or $2.4 million revenue increase. Pushed under the Texas law, the new rate should become effective subject to refund in December of this year. SJWTX customer account and rate base continue to grow in both our water and waste water operations. Year-to-date in 2013, approximately 370 new connections were added through organic growth and acquisitions, bringing the total number of customers to 11,000, representing a roughly 4% annual growth rate in customers. SJWTX continues to receive new requests for service and our acquisition program remains robust. I'm also excited about the prospects for our small but rapidly growing wastewater business. The state-wide water supply assessment in both California and Texas remains unchanged as both states experienced hot and dry summers typical for the regions, and adequate water supplies have been available to meet current demands. SJWTX's and San Jose Water Company's robust and diversed water supplies remain a key asset at competitive advantage to our continued growth. In summary, SJW remains keenly focused on controlling expenses and investing intelligently in our water systems. Over the long haul, SJW is sensible and efficient regional utility business model, along with prudent investments in our water systems should contribute to sustained growth and profitability, earnings and dividends for our shareholders, and safe, reliable, high-quality water service for our customers. With that, I will turn the call back to the operator for questions.

[Operator Instructions] And our first question is coming from the line of Heike Doerr, Robert W. Baird. Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division: I wondered if we could talk about what your CapEx budget looks like for the next couple of years, now that we have Montevina approved? And also, how are you managing the 2013 budget, which should have been approved as part of this rate case in the absence of a final decision?

Well, I get -- Palle here, what we're basically doing is, as you probably recall from prior comments that we have made, we have about $225 million worth of undisputed projects in the rate filing. And we have decided to go ahead and make -- and construct those projects even in the absence of an official commission approval, because we believe those projects are going to be approve -- ultimately be approved. For our 2014, we are doing the same thing that we are -- we've taken the projects that we're undisputed in the rate case and doing additional projects related to main replacements, well replacement and tank replacements that we -- are sort of our bread-and-butter capital investment projects. So I think Jim will probably be better to address the issue related to the size of the capital budgets for the next couple of years.

That's right. So Heike, we had in our 10-K, proposed a capital expenditures over the next 5 years of about $565 million plus the Montevina Water Treatment Plant upgrades. We certainly are taking a look at that number now in relation to the fact that we have been delayed in the 2013 rate case. And as Palle mentioned, our focus in most of our efforts on those areas that were largely uncontested in our discussions with the DRA. So for now, we will continue to monitor that, and we'll adjust the budget appropriately as a decision comes forth. Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division: Got it. And on the regulatory front, can you talk to us a little bit about how you're going to transition your regulatory coverage in Texas, and what the process is for going from the TCEQ to the PUC?

Yes, it's -- the legislation that was passed in the last session basically moves the regulatory oversight to the PUC effective as of September 2014. Now what was also included in that legislation was a provision that required the PUC to undertake a rulemaking to determine the exact construct under which we should be -- or they should have the regulatory oversight over water utilities. That is supposed to be completed 1 year later, that is September of 2015. We're currently in the process, we've had discussions with the PUC on how this rulemaking is going to take place and what format that it's going to be carried out. And so we're working with the PUC to make sure we get an appropriate regulatory structure in place that can effectively handle water utility filings. As you probably know, it's a pretty rigorous process at the PUC, that the PUC is currently using for oversight of energy utilities. And we would like to see if we can make some modification to that rigorous process because of the number of water utilities included under the regulation and the frequency of filings. So we're looking at an efficient process that will allow us to get a timely rate release in Texas. Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division: And if this rate case that you just filed isn't completed, would the TCEQ finish any pending rate cases or with this rate case have a potential to get moved over midstream?

No, it will be completed under TCEQ oversight because it was filed under that. What the -- there's a provision in the legislation that allows the OPAP, which is the consumer advocate at the PUC to become an intervener in water company rate cases at this point. At this time, we don't know whether that's going to happen or not because we haven't had a preliminary hearing and probably won't have one for -- within the next couple of months.

[Operator Instructions] At this time, I'm showing no further questions in queue. I would like to turn the call back over to Mr. Rich Roth for any closing remarks.

Thank you, and thank you all for tuning in today. We look forward to talking to you at the end of the fourth quarter early next year. And happy Halloween to everyone.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.