H2O America (HTO) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the SJW Corp. Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Suzy Papazian, General Counsel. You may begin.

Thank you, operator. Welcome to the third quarter 2015 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 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 press release and to our most recent Forms 10-K and 10-Q filed with the Securities and Exchange Commission, copies of which may be obtained at www.sjwcorp.com. 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 is being recorded and an archive of the webcast will be available until January 25, 2016. You can access the press release and the webcast at our corporate website. 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. For the first time today, we are incorporating the use of slides in our call for those who would like to follow along. Please visit our website at www.sjwcorp.com to view them. SJW’s third quarter results reflect lower usage and the regulatory delay associated with recovery of 2014 and 2015 loss sales. Despite the regulatory delay that has impacted earnings, the fundamental elements that drive our business and lead to sustain profitability remain strong. As evidence of SJW’s strong fundamentals, SJWC’s and SJWTX’s capital expenditure programs including the Montevina Water Treatment plant upgrade project are on track to add $108 million of capital improvements in 2015. To help put San Jose Water Company’s capital expenditure programs into perspective, please note that the company’s rate base has grown at a compound annual growth rate of over 8% since 2010. Looking ahead, San Jose Water Company is seeking regulatory approval in its pending general rate case to invest approximately $230 million in 2016 and 2017. SJW’s meticulous plan and capably executing capital program is essential in ensuring that our customers continue to receive high quality and reliable water service. Specifically, the renovation of the Montevina Water Treatment plant will markedly improve SJW’s ability to meet the region’s growing water supply challenges by treating a much broader spectrum of source water. While regulatory lag seems to have become the norm, the California and Texas regulatory environments remain generally constructive as evidenced by their support of rates and regulatory mechanisms that balance the need for continued investments with the need for conservation and affordability. An important example of California’s supporting regulatory regime is the California Public Utility Commission’s authorization for San Jose Water Company to record in memorandum accounts the difference between authorized and actual revenue, net of variable production costs as long as water use restrictions remain in effect. We were also encouraged that California regulators appear to be adopting sales forecasts that reflect and support our customers’ conservation efforts, thus reducing the need for additional charges to recover the difference between authorized and actual customer usage. SJWTX, Inc., our Texas Water and Waste Water Utility continues to experience robust growth in connections and revenue. Additional, SJWTX’s regional business model helps ensure that we’re able to provide high quality sustainable and reasonably priced water service as we sensibly expand our operations. I would now turn the call over to Jim, who will provide you with a detailed review and analysis of 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. Net income for the quarter was $9.5 million or $0.46 per diluted share. This compares to $38.4 million or $1.88 per diluted share for the third quarter of 2014. Year-to-date, net income was $21.7 million or $1.06 per diluted share, compared with $46.1 million or $2.26 per diluted share for the same period in 2014. Third quarter revenue was $83 million, a 34% decrease over the third quarter of 2014. And year-to-date, 2015 revenue was $217.5 million, a 13% decrease over the first nine months of 2014. A significant portion of the change in our operating results was attributable to the decision in our 2012 general rate case decision in California that occurred in the third quarter of 2014. Recall that we recognized $46.5 million of revenue at the time the decision was received. This included true-up revenue, a revenue related to prior periods of approximately $37.7 million or $1.09 per diluted share recognized in the third quarter of 2014. Year-to-date, true up revenue and diluted per share earnings related to prior periods that were recorded in 2014 was approximately $21.9 million and $0.68 per diluted share respectively. Our 2015 quarterly and year-to-date results reflect the impact of rate increases that contributed approximately $12.4 million in new revenue or $0.38 per diluted share and $33.2 million in revenue or $1.02 per diluted share respectively. Results also reflect the impact of lower usage in our California service area due to the drought and related water conservation activities. In response to the drought, the Santa Clara Valley Water District set its 2015 water usage target at 30% below 2013 usage levels. This was followed by the CPUC's authorization in June of 2015 to activate San Jose Water Company’s water shortage contingency plan that includes mandatory water usage reductions and the imposition of drought surcharges. As a result, we experienced a decline in customer usage of 12% in the third quarter, resulting in a $15.3 million reduction in revenue compared to the third quarter of 2014 or $0.47 per diluted share. Year-to-date, customer usage declined 11%, resulting in a $28.4 million revenue reduction or $0.87 per diluted share compared to the same period in the prior year. The revenue impact of lower usage due to water conservation is being tracked for future recovery in the company's Mandatory Conservation Revenue Adjustment Memorandum Account or MCRAMA. During the 2015 third quarter the balance in the MCRAMA increased approximately $15.7 million to $25.6 million. In March of 2015, the company submitted a filing with the CPUC for recovery of approximately $9.6 million of the balance related to the period from April 1, 2014 to December 31, 2014. The company will recognize amounts approved by the CPUC under this filing net of any previously recognized supply balancing amounts once approval is received. We currently anticipate this will occur in the 2015 fourth quarter. Amounts accumulated in the MCRAMA for 2015 and beyond will be recognized once recovery is determined to be probable and other revenue recognition criteria have been met. We began collecting drought surcharges under our Water Shortage Contingency Plan in June of 2015. Through the third quarter of 2015 collections were $6.3 million. The collected surcharge amounts are not recorded as revenue rather they are recorded as regulatory liabilities. Once we begin recognizing the 2015 MCRAMA revenue, we will offset amounts due from customer surcharges with amounts collected in the drought surcharge liability account. In the meantime, drought surcharge collections provide the company with additional operating cash flows. The company is also tracking drought-related operational and administrative costs for future recovery in a Mandatory Conservation Memorandum Account or in MCMA. As of September 30, 2015, $5,500 was accumulated in the MCMA. The drought surcharge account, MCRAMA and MCMA will remain in effect until state water drought water restrictions are lifted. Lastly, in 2015 our year-to-date results include $1.9 million in revenue or $0.12 per diluted share related to the CPUC’s decision in the first quarter on our limited rehearing request on the effective date of our 2014 rates. Turning to water production, the lower usage we've experienced in both our California and Texas service areas and California due to water conservation and in Texas due to higher than normal rainfall has resulted in lower cost production. For the quarter, usage declines reduced production costs by $9.5 million or $0.29 per diluted share and year-to-date by $18.4 million or $0.57 per diluted share. This cost reduction was partially offset by the impact of increases in purchased water expenses and ground water production charges of $5.5 million or $0.17 per diluted share for the quarter and $9.3 million or $0.28 per diluted share year-to-date. Also recall that through the first nine months of 2015 we used 1.5 billion gallons of surface water compared to 230 million gallons in the same period of 2014. The use of surface water in the third quarter was not significant. However, year-to-date surface water use resulted in a $3.1 million or $0.10 per diluted share reduction in water production expenses. We do not anticipate any meaningful benefit from surface water supplies through the remainder of 2015. Non-production operating expenses included a $1.1 million increase or $0.03 per diluted share for the quarter and $2.7 million increase or $0.08 per diluted share year-to-date in pension expenses. The increase was primarily driven by changes in the underlying assumptions used to calculate periodic pension costs. In addition both the quarter and year-to-date include higher cost incurred in connection with our 2015 California general rate case and conservation activities in our California service area. Other expense and income in the third quarter of 2015 included the sale of multiple non-utility real estate properties for a gain of approximately $1.9 million or $0.06 per diluted share. Other expense and income in 2014 included a gain on the sale of California Water Service Company stock in the second quarter of $2 million or $0.06 per diluted share and sales of real estate investment properties in Texas and California in the second and third quarter respectively of approximately $300,000 each or $0.02 per diluted share. Another point of note, in the third quarter of 2014, the company recorded an income tax benefit of $4.8 million or $0.23 per diluted share related to the adoption of the Department of Treasury and Internal Revenue Service tangible property regulations. This was for the years 2013 and previous. Year-to-date the company also recorded a benefit of $880,000 or $0.04 per diluted share on the recognition of enterprise zone tax credits in 2014; similar amounts were recorded in 2015. Turning to our capital expenditure program, we added approximately $25 million in utility plant during the third quarter bringing our 2015 total to $63 million or approximately 58% of our 2015 planned utility plant capital expenditures. We anticipate completing approximately 90% of our planned utility plant capital budget amount in 2015. In addition, we have revised the timing of our planned capital expenditures on our Montevina plant retrofit project putting more of the budgeted cost in 2016 and 2017 as a result of design revisions and contract finalization. Including the Montevina plant retrofit project, we are on target to add approximately $108 million in utility plant in 2015 growing rate base in both our California and Texas service areas. From a liquidity perspective, year-to-date cash flows from operations increased by approximately $26 million or 58% due in large part to higher income and the collection of a $6 million income tax receivable that was generated at the end of 2014. In addition, we experienced a $10.6 million benefit from the collection of revenue in connection with the 2012 California rate case decision. Recall that the $46.5 million we received in the decision is being collected over a 36-month period that commenced in October 2014. At the end of the quarter we had $75.8 million available under our bank lines of credit for the short-term financing of utility planned additions and operating activities. The borrowing rate on credit line advances during the year averaged 1.3%. With that, I will stop and turn the call back over to Rich.

Thank you Jim. In a testament to the efficacy of San Jose Water Company’s stout management plan, customers exceeded the conservation target set by the State Water Resources Control Board and the Santa Clara Valley Water District, our wholesale water supply. As a result, water levels in our local groundwater basins have rebounded, thus minimizing the existential threat of subsidence. It’s worth noting and plotting the tremendous response from our customers to the conservation mandate, their response has been enormously important in protecting the regions critical underground storage basin. San Jose Water Company’s ability to respond quickly and effectively to the vagaries of California's water supply requires a comprehensive communications program to engage and inform customers and stakeholders. We have taken important steps to establish and maintain a web-based communication program that is the cornerstone of our efforts to effectively deliver timely and relevant customer information. Now let's turn our attention to regulatory affairs, where San Jose Water Company’s 2015 general rate case is being processed by the California Public Utilities Commission. We anticipate the CPUC's final decision by the end of 2015 for new rates for the years 2016, ’17, and ’18. In the event a final decision is not reached by the end of this year, San Jose Water Company will file for interim rates effective January 1st 2016. The interim rate filing is very important because it ensures that regardless of regulatory delay, new rates will be effective retroactive to January 1st 2016. San Jose Water Company’s Mandatory Conservation Revenue Adjustment Memorandum Account or MCRAMA established on March 26, 2014 allows the company to track revenue shortfalls net of production costs associated with reduced sales resulting from government mandated water restrictions. On March 26, 2015, the company filed for collection of $9.6 million associated with sales lost during the period April 1, 2014 through December 31, 2014. A decision on that filing is expected in late 2015. On September 20, San Jose Water Company received authorization to increase its revenue requirement by $274,721 via a rate base offset for planned additions related to the Montevina Water Treatment Plant upgrade project. More importantly, Montevina project will allow San Jose Water Company to maximize the use of our low-cost high-quality surface water supply for the benefit of our customers. Construction began in late September this year and the project is expected to be substantially complete by the end of 2017. When complete, the project will add a total of $62 million in utility plants and service in addition to the capital additions contained in San Jose Water Company’s general rate case proceeding. Despite the many instances of regulatory lacks, San Jose Water Company continues to constructively engage with regulators and to ensure that all filings are diligently processed. With the aforementioned strong fundamentals in place, San Jose Water Company and SJW Corp. continue to refine our business processes and strategies to effectively respond to the vicissitudes in weather, regulatory rulings, and economic conditions. Over the long haul, we remain confident in our ability to deliver sustained growth and profitability, earnings and dividends. With that I will turn the call back to the operator for questions.

Okay, thank you operator. Before we end the call, I'd like to pull up one more slide, our earnings bridge for the quarter. The earnings bridge starts with our reported 2014 Q3 quarterly diluted earnings per share and then it reconciles the impact of activity reported quarter over quarter to get to our Q3 2015 quarterly earnings per share. We thought that that would assist you following along on the website with understanding the different components that went into driving our Q3 2015 revenue. With that Rich?

Thank you everyone for joining us, we look forward to talking to you with our year-end results.