H2O America (HTO) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for your patience. You’ve joined the Second Quarter 2016 Financial Results Conference Call for SJW Corp. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Ms. Suzy Papazian, General Counsel. Ma’am, you may begin.

Thank you, operator. Welcome to the second quarter 2016 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 that 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, 10-Q and 8-K 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 will be available until October 24, 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 those of you would like to follow along, slides accompanying our remarks are available on our website at www.sjwcorp.com. SJW’s solid second quarter results reflect a final decision on San Jose Water Company’s 2015 General Rate Case application establishing new rates retroactive to January 1, 2016. A constructive regulatory environment with mechanisms in place to provide protection for sales lost due to the drought and related mandatory conservation rules. Strong cash flow as we continue to collect the 2013 and 2014 true-up adjustment resulting from a late decision on San Jose Water Company’s 2012 General Rate Case and a high level of capital investments delivering robust growth and rate base. Jim Lynch will now discuss in more detail SJW Corp’s second quarter and year-to-date results as well as other financial matters. After Jim's remark, I will provide additional information on our regulatory filings, water supply and other key operational and business matters. Jim.

Thank you, Rich. Net income for the quarter was $16.8 million, or $0.82 per diluted share, compared to $7.5 million, or $0.36 per diluted share for the second quarter of 2015. Year-to-date net income was $20.2 million or $0.98 per diluted share compared with $12.2 million or $0.59 per diluted share in 2015. Second quarter revenue was $86.9 million, a 20% increase over second quarter of 2015. And for the year revenue was $148 million or 10% increase over 2015. The net increase of $0.46 in earnings per share for the quarter was attributable to customer rate increases of $0.13 per share. A $0.25 per share recovery of true-up revenue recognized primarily as a result of our 2015 General Rate Case decision. Recognition of $0.10 per share in net revenue tracked in our Water Conservation Memorandum Account or our WCMA and $0.09 per share from the gain on sale of California Water Service Group stock. These increases were partially offset by a $0.07 per share decrease attributable to low customer sales. Higher water production expenses of $0.03 per share and an increase in depreciation and amortization expense of $0.03 per share. The same factors contributed to our net increase of $0.39 earnings per share year-to-date. Customer rate increases were $0.24 per share. $0.20 per share was recognized on the recovery of 2016 General Rate Case true-up. And we recognized $0.19 per share in WCMA revenue. We also experienced water cost savings of $0.11 per share due to lower water usage and recognized $0.89 per share gain on the sale of California Water Service Group stock. The year-to-date increase was partially offset by lower customer sales of $0.26 per share. Higher water production expenses of $0.11 per share and an increase in depreciation and amortization expenses of $0.06 per share. Turning to revenue Rich mentioned the decision we received on our 2015 General Rate Case in California. The decision provided an 8.6% increase in our 2016 authorized revenue requirement with an effective date retroactive to January 1, 2016. The Company recorded $8.8 million in true-up revenue related to the period from the effective date through June 14, 2016 which was a decision implementation date. It should be noted that all of the 2016 true-up revenue relates to sales made in the current year. Staying with California while the local water supply situation has improved we continue to operate under drought conditions in our Northern California service area. Rich will provide an update on local water supplies and the easing of water use restrictions in his remarks to follow. As a result of continued customer conservation efforts customer usage was 1% lower during the quarter compared to the second quarter of 2015. This resulted in a $2.5 million reduction in revenue. Year-to-date customer usage was lower by 9% result in a $9 million reduction in revenue. We call that the difference between revenue authorized by the California Public Utilities Commission or the CPUC and actual revenue net of any variable cost savings from lower water purchase volumes is tracked in the Company’s WCMA. For the quarter and year-to-date, we have recognized $3.7 million and $6.8 million respectively in net WCMA revenue. Turning to water production, lower water usage in our Northern California service area resulted in a slight change in water production costs for the quarter. Water production costs were up $900,000 for the quarter largely due to higher purchase water cost of $3.6 million partially offset by $2.8 million due to an increase in the use of available surface water. Year-to-date water production costs were essentially flat compared to 2015 with cost savings from lower usage and available surface water offset by water cost increases. Operating expenses excluding water production costs were $29.5 million, an increase of $1.1 million when compared to the second quarter of 2015. The increase was primarily the result of higher depreciation expenses due to assets placed in service during 2015 and nominal changes in other operating accounts. Year-to-date non-water production operating expenses were $59.4 million, an increase of $3.1 million over 2015. This change was due to the same factors noted for the quarter. Other expense and income for the second quarter and year-to-date 2016 included a pre-tax gain of $3.2 million on the sale of California Water Service Group stock. No similar sale occurred in 2015. Turning now to our capital expenditure program, we added $31.3 million in utility plant in the second quarter of 2016, bringing us to $62.9 million year-to-date. This represents approximately 43.4% of our 2016 planned utility plant expenditures. Our approved 2015 rate case decision in California included $105 million in new construction projects in 2016 consistent with our planned 2016 capital budget. The California General Rate Case construction budget is designed to achieve an adopted rate base for 2016 and 2017 of $659 million and $716 million respectively. Our planned capital expenditures also include approximately $9.9 million in capital projects carried over from prior years and approximately $25 million for our Montevina Water Treatment Plant project. Recall that the Montevina project is an advice letter project that was approved outside of the 2015 California General Rate Case. As such it is an addition to the $105 million approved in the 2015 decision. The Montevina project is being constructed using a method that allows surface water production through the plant between construction phases. In the second quarter of 2016, we processed approximately 1.6 billion gallons of surface water through the plant, brining our year-to-date total to 2.4 billion gallons. The plant was shutdown on July 1 for the next phase of construction which is anticipated to be completed in December of 2016. From a liquidity perspective, year-to-date cash flows from operations increased by $9.9 million or 22% over 2015, primarily due to general working capital, collection of receivables and collection of various balancing and memorandum accounts including $5.3 million in collections from the 2012 rate case true-up. In addition, we collected $8.1 million in cash from drought surcharges. We have been collecting drought surcharges under our water shortage contingency plan since June of 2015. Amounts collected are initially recorded by the Company as regulatory liabilities. The collections are subsequently used to offset amount authorized by the CPUC for recovery under the WCMA. On June 1, 2016 the Company entered into credit agreements totaling $145 million with JPMorgan Chase Bank. The new credit agreements are for five years and include a pay down provision every two years with the 30 days stay out period. At the end of the quarter, we had $89 million available on our bank lines of credit for short-term financing of utility plant additions and operating activities. The borrowing rate on line of credit advances average 1.56% here in 2016. With that, I’ll stop and turn the call back over to Rich.

Thank you, Jim. As previously mentioned, San Jose Water Company receded final decision on its 2015 General Rate Case covering the year’s 2016 through 2018. The decision lower sales levels and validates the Company's capital program. Key provisions of the decision include an 8.6% rate increase for 2016 retroactive to January 1, 2016. A three-year capital program totaling $314 million. Recovery of most of the companies cost structure and a residential sales number that aligns nicely with the targeted Water Conservation sales number. In general, the decision supports San Jose Water Company’s efficient regional utility business model and provides a realistic opportunity for the Company to earn its authorized return. Other second quarter regulatory highlights include approval to increase rates by approximately 6.7% or $21.4 million to cover the increase in wholesale water rates charged by the Santa Clara Valley Water District. Turning to water supplies, while statewide water supplies are markedly improved over previous years. The governor’s statewide emergency drought declaration remains in effect. In May, the State Water Resources Control Board adopted changes to its Water Conservation regulations and made certain drought rules permanent. More importantly, the State Water Board replaced it across the board percentage based Water Conservation standard with a more localized approach. Accordingly in June, the Santa Clara Valley Water District reduced the countywide conservation target from 30% to 20%. The new restrictions are effective from July 1, 2016 through January 31, 2017. In response to both the State Water Boards and district actions San Jose Water Company revised its water observation program to reflect the 20% conservation target requested by the district. As discussed previously, the California Public Utility Commission authorized a Water Conservation Memorandum Account or WCMA allowing San Jose Water Company to track lost revenue due to government mandated Water Conservation. This memorandum account provides assurances that reduce sales net of associated production costs resulting from mandatory conservation rules maybe recovered through an advice letter filing when the WCMA balance exceeds 2% of annual authorized revenue. Additionally, drought surcharges maybe used to offset the WCMA affectively reducing the need for future filings to recover revenue lost due to mandatory Water Conservation measures. Turning to our Texas operation. The I-35 corridor between Austin and San Antonio continues to thrive with new commercial and residential developments and SJWTX, Inc. our Texas water and wastewater utility also continues of thrive. Since its acquisition in 2016, SJWTX has gone from approximately 7,000 to 13,000 connections owing to strong organic customer growth and an aggressive acquisition program. The customer growth delays a need for a General Rate Case which benefits customers and shareholders alike. Diminish water supplies and the replacement of aging infrastructure having a significant impact on rates. And that means an effective communication program is critical to providing customers with an enhanced understanding of how they affect rates. Accordingly, SJW is expanding its communications capability and providing customers with clear and relevant information about the key issues driving rates. To this end, SJW has established communications as a core competency and a top priority to ensure that on a company-wide basis all employees understand the importance of keeping customers, regulators, and stakeholders informed. New communication platforms and networks including social media are effective and efficient modalities for providing interactive and responsive customer information. In summary, SJW remains an excellent long-term investment as a shareholder you can be assured of a proven business model and a viable capital program that drives rate base and earnings growth, a demonstrated ability to obtain commission authorization for necessary infrastructure investments, a capability to translate regulatory decisions into balanced and sustainable dividend and earnings growth, and an operational excellence evidence by 150 years of delivering safe, reliable, and high quality water service to our customers. As we celebrate our 150 anniversary in 2016, we are proud of not only what we have achieved, but how we have achieved it through an enduring top to bottom commitment to operational excellence, customer service, and financial performance. With that, I will turn the call back to the operator for questions.

Thank you, sir. [Operator Instructions] Our first question comes from the line of Katherine Burke of Janney Montgomery. Your line is open.

Hi, guys.

Good morning.

Good morning. [Indiscernible]. Have there been any new development either the land business or the Bay-Delta?

Well, with regards to our land business we continue to take a look at elements of our portfolio and assess whether or not the market conditions are favorable for us to continue to hold those or to dispose of our land holdings. In the current year we did - in the current quarter we did or have been participating in a negotiations with the Arizona Department of Transportation for a property that we have. In Arizona that is adjacent to highway I-10, there is currently an expansion project that's going on with regards to that project. And we have been in discussions with them in terms of coming up with a negotiated price for that property, so that they can move forward with the particular project. And I'm sorry; the second part of your question was with regards to the Bay-Delta?

Yes. Correct.

I think I'd like to ask Rich to address that comment.

Well, the Bay-Delta or the California fixes going to fix the Bay-Delta to provide water service – continued water services is pretty much mired in red tape and does not look like it will be moving forward any time soon. There's continues to be quite a bit of disagreement over how the project should be perceived and paid for, is the primary – one of the primary elements at this point. So as far as the Bay-Delta or the Bay-Delta California fixes they call it, the water fix, it's pretty much at a standstill right now.

Okay. Thanks guys.

Okay. End of Q&A

Thank you. As there are no further questions. I’d like to turn the call back over to Rich Roth for closing remarks, sir.

Thank you very much. Thank you everyone for joining us. We look forward to talking to you at the end of the third quarter.