H2O America (HTO) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for your patience. You’ve joined the SJW Corp., Third Quarter 2016 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 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 third 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 of the webcast will be available until January 23, 2017. 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. In spite of the operational and financial challenges wrought by continuing conservation mandates and water supply challenges SJW delivered strong third quarter results. The results are principally a manifestation of the Company's consistent and intelligent capital program. Effective conservation mechanisms and the regulatory environment that now recognizes the structural changes in water supplies and consumption. We are aware however that water supply challenges remain and new and reliable water supplies will be needed. A growing population, environmental demands and changing weather patterns have resulted in long-term structural changes to the California Water Supply demand profile that must be addressed. SJW believes viable solutions exist and we will continue to work with regional partners to seek new cost effective and sustainable regional water supplies. We also understand the impact on customers of structural changes to water supplies and the subsequent increased need for clear and cogent communications to explain the largely uncontrollable effects of diminished water supplies. We are rapidly building the Company's communication proficiency via programmatic initiatives to ensure the Company's capabilities match our communication needs. And that we are able to satisfy growing customer interest in water. Jim Lynch will now discuss in more detail. SJW’s third quarter and year-to-date results as well as other financial matters after Jim's remarks. I will provide additional information on our regulatory water supply and other key operational and business matters. Jim.

Thank you, Rich. As Rich mentioned our third quarter and year-to-date operating results reflect the positive impact our water conservation revenue mechanisms are having in California. And our ongoing infrastructure investment activities in both California and Texas. Net income for the quarter was $19 million or $0.92 per diluted share. This compares with $9.5 million or $0.46 per diluted share for the third quarter of 2015. Year-to-date net income was $39.1 million or a $1.90 per diluted share compared to $21.7 million or $1.06 per diluted share for the same period in 2015. Third quarter revenue was $112.3 million or 35% increase over the third quarter of 2015 and year-to-date revenue was $260.4 million which is a 20% increase over the same period in 2015. The net increase of $0.46 in diluted earnings per share for the quarter was primarily attributable to customer rate increases of $0.36 per share a $0.28 per share increase due to the higher customer usage and recognition of $0.19 per share and net revenue tracked in our Water Conservation Memorandum Account or our WCMA. These increases were partially offset by higher water production expenses of $0.17 per share and higher customer sales of $0.10 per share. The same factors contributed to our net increase of $0.84 diluted earnings per share year-to-date. Customer rate increases were $0.79 per share and we recognize $0.38 per share in net WCMA revenue. In addition we recognized a $0.09 per share gain on the sale of California Water Service Group stock. On year-to-date basis the increases were partially offset by higher water production expenses of $0.29 per share and an increase in depreciation and amortization expense of $0.09 per share. Despite improving local water supply conditions we continue to operate under drought restrictions in our California service area imposed by the Santa Clara Valley Water District of the district in order to promote recovery of the local groundwater basin. However, in recognition of the improving conditions the district reduced its conservation target effective July 1, from a 30% to a 20% reduction of base year 2013 usage. As a result we saw an increase in customer usage in the third quarter compared to the third quarter of 2015. This resulted in a $9.5 million increase in third quarter revenue. Year-to-date customer usage lag primary usage by approximately 1%. As I discussed on our last quarter's call. 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 recorded in our WCMA account. For the quarter and year-to-date 2016, we recognized $6.6 million and $13.1 million respectively in net WCMA revenue. Recall that no WCMA revenue was recorded through the first nine months of 2015. As we met the requirements for revenue recognition under the mechanism in the 2015 fourth quarter. Also on our last call we reported that our 2015 general rate case decision, which we received this past June provided an 8.6% increase in our 2016 authorized rates. The company recorded $12.4 million in rate increases in the third quarter and $20.5 million year-to-date along with true-up revenue in the year-to-date period of $6.8 million. Water production costs were up $9.5 million for the quarter of which $5.7 million was due to water cost increases by the district and the remainder to higher customer usage. Year-to-date water production costs were $9.6 million higher than 2015 largely due to $12.3 million in higher district water costs partially offset by $2.5 million and lower expenses due to an increase in the use of our available surface water supply. Operating expenses excluding water production costs were $31 million an increase of $1.8 million when compared to the third quarter of 2015. The increase was primarily the result of higher depreciation expenses due to assets placed in service during 2015. Year-to-date non-water production operating expenses were $90.4 million which is an increase of $4.9 million over 2015. Similar to the quarter the change was due primarily to higher depreciation expenses. Other expense in income for the year-to-date in 2016 include a pretax gain of $3.2 million on the sale of California Water Service Group stock. No similar sale occurred in 2015. Now turning to our capital program, we added $40 million in utility plant in the third quarter of 2016 bringing total additions to $102.8 million year-to-date. This represents 71% of our 2016 plan utility plant expenditures. Turning to liquidity year-to-date cash flows from operations increased 6% over 2015 included in operating cash flows is a collection of various balancing and memorandum accounts including $10.4 million in collections from the 2012 and 2015 GRC true-ups. In addition we collected $18.6 million in cash from drought surcharges. We've 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 and then subsequently used to offset amount authorized by the CPUC for recovery under the WCMA mechanism. At the end of the quarter we had $81.1 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 has averaged 1.52% here in 2016. And now on a final note we previously disclosed that a property owned by our real estate subsidiary SJW Land Company was a subject of an eminent domain proceeding by the Arizona Department of Transportation or ADOT. The Company reached a settlement with ADOT on the property value of $20 million entitled to the property transferred in mid-October 2016. In connection with the proceeding, the Company will record again net of taxes and expenses of approximately $5.8 million in our 2016 fourth quarter. With that, I'll stop and turn the call back over to Rich. Rich?

Thank you, Jim. San Jose Water Company was able to meet peak customer demands in the third quarter despite continuing drought restrictions for our California service area as noted by Jim. Locally, our water supply conditions continue to improve as a result of continued conservation. Groundwater levels have rebounded and this bodes well for our water supplies in 2017. The California Public Utility Commission continues to provide effective leadership, guidance and assistance to California investor-owned water companies and reconciling state and local water conservation mandates and remains supportive of conservation efforts. As Jim noted, the commission authorized a Water Conservation Memorandum Account allowing San Jose Water Company to track revenue lost due to government mandated water conservation. This and related regulatory mechanisms provide an improved opportunity to earn our authorized rate of return. SJW remains on track to complete its record $145 million 2016 capital improvement program. The renovation of the Montevina Water Treatment Plant also remains on track for completion in 2017. Once completed, the renovated plant will be able to treat more stormwater than previously was the case. Obviously, this will enhance San Jose Water Company’s ability to meet the region's growing water supply challenges, ensure compliance with increasingly stringent drinking water regulations and allow us to continue to deliver high quality safe and reliable water service. In summary, SJW has two outstanding regional water utilities located in economically vibrant and growing regions. Our fundamentals remain strong as we continue to prudently invest in our water systems to provide superior service levels and deliver reliable water supplies at a reasonable price. Over the long haul, we remain confident in our ability to deliver sustained growth and profitability, earnings and dividends. With that, I'll turn the call back to the operator for questions.

Thank you, sir. [Operator Instructions] Thank you. And our first question comes from the line of Michael Gaugler of Janney Montgomery. Your line is open.

How are you doing?

All right. Michael, how are you?

Good. How are you, sir?

Very good.

I see that. Maybe you gentlemen can give me some inside into the increased usage you saw in the quarter, maybe some additional color as to – was that just some kind of pent-up demand were suddenly we had partial restrictions lifted and everybody just was kind of maybe playing catch up in terms of things they needed to do with supply and how sustainable that might be on a go forward basis?

Well, I think you've actually captured many of the reasons Michael, as with most things it's a confluence of many factors and not just one. One that you might have missed in the reasons you cited was just sort of drought fatigue. I think people are just – they've made a concerted effort in 2015 and they did a great job and they're kind of like – we need to go back and water our trees and plants and so forth. So I think people want to get back to life, it somewhat like it was. I mean they realize that there are structural reductions in the water supply. But overall, I think people just want to sort of have their outside and inside activities at some level like it was in the past. That's about the only thing I can add to what you said Michael.

Okay. The other stuff was pretty clear cut, so I'll leave it there. That's all I have in terms of questions.

Great. End of Q&A

[Operator Instructions] At this time, I'd like to turn the call back over to Rich Roth for any closing remarks. Sir?

Thank you. Well, thank you all those who are tuned in and listening to the call and those who will listen to it afterwards. We appreciate your investment in SJW. I look forward to talking to you next year in reporting fourth quarter results. Thanks.

Thank you, sir and thank you, ladies and gentlemen. This does concludes your program. You may disconnect your lines at this time. Have a wonderful day.