H2O America (HTO) Q2 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and thank you for your patience. You've joined the Second Quarter 2017 Financial Results Call for the SJW Group. 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, with General Counsel. Ma'am you may begin.

Thank you, operator. Welcome to the second quarter 2017 financial results conference call for SJW Group. Presenting today are Richard Roth, Chairman of the Board, President and Chief Executive Officer; and James Lynch, Chief Financial Officer. For those who would like to follow along, slides accompanying these 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 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 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 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 October 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 Executive Vice President. SJW Group’s solid second quarter results reflected strong cash flows, which have allowed us to avoid short-term borrowings and delay long term borrowings, continued growth in rate base fuelled by a record capital improvement budget, and a modest growth and customer usage. Jim will now discuss in more detail SJW's second quarter year-to-date results, as well as other financial matters. After Jim's remarks I will provide additional information on our regulatory filings, water supply, and other key operational and business matters. Jim?

Thank you, Rich. Second quarter revenue was $102.1 million, a 17.4% increase over the second quarter of 2016. Year-to-date revenue was $171.1 million, which is 15.6% increase over the same period last year. SJW Group net income for the quarter was $18.7 million or $0.90 per diluted share. This compares with $16.8 million or $0.82 per diluted share for the second quarter of 2016. For the year, SJW Group net income was $22.4 million or $1.8 per diluted share, compared to $20.2 million or $0.98 per diluted share in 2016. The quarterly net increase of $0.08 in SJW Group diluted earnings per share was primarily due to rate increases of $0.44 per share, balancing and memorandum account activity, including the Water Conservation Memorandum Account or WCMA of $0.17 per share, and a gain on the sale of real estate investments of $0.15 per share. These increases were partially offset by true-up revenue recognized in 2016 on our California GRC decision of $0.26 per share, higher water production expenses of $0.16 per share, a decrease in the use of available surface water of $0.12 per share, and other expense increases of $0.14 per share. The $0.10 increase in year-to-date SJW Group diluted earnings per share was driven mainly by the same factors as the quarter. The impact of customer rate increases was $0.70 per share balancing and memorandum account activity, including the WCMA increased by $0.19 per share and we recognized a gain on the sale of real estate of $0.15 per share. These increases were partially offset by higher water production expenses of $0.27 per share, true up revenue recognized in our 2016 California General Rate Case of $0.26 per share, a decrease in the use of surface water of $0.19 per share, and an increase of other expenses of $0.18 per share. The rate increases for the quarter and year-to-date resulted in $15 million and $23.6 million, respectively of additional revenue. The increases were primarily the result of the 2017 escalation increase authorized in our 2016 GRC decision of 3.8% and 1.5% increase related to the completion of plan 2016 improvements at our Montevina Water Treatment Plant. In addition, rates increased due to the authorized recovery of Santa Clara Valley Water District or the district’s water cost increase. We call that the district, our wholesale water provider in California, instituted a 20% cost increase for the purchased imported water and ground water pump taxes in the third quarter of 2016. In California, we continue to benefit from our WCMA, which contributed 4.7 million in additional revenue for the quarter and $5.2 million year-to-date. As Rich will discuss in more detail, the district has maintained its call for conservation at 20% of 2013 usage levels, and water usage restrictions by the state water resources control board remain in place. We experienced a slight recovery in usage through the first six months of 2017, usage levels remain approximately 30% below 2013 levels, and 20% below authorized usage in our 2016 GRC. Water production expenses increased $10.8 million during the quarter, and $16.3 million year-to-date. The increases were primarily due to the districts July 6, 2016 cost increase, which I previously mentioned and a decrease in the availability of low cost surface water. Regarding surface water, while we received record rainfall in the Lake Elsman watershed this past rain year, our Montevina Water Treatment Plant was off-line due to the final phase of construction on our Plant Retrofit project. The project is expected to be completed during the fourth quarter of 2017, at which time we will begin to benefit from the more than 2 billion gallons currently stored in the Lake. Other operating expenses increased $3.3 million for the quarter and $5.5 million year-to-date, primarily due to payroll increases and increases in depreciation and other taxes related to capital improvements. Other income and expense included a $6.9 million pretax gain in the second quarter on the sale of two real estate properties in downtown San Jose. One of the two properties sold was a commercial building owned by SJW Land Company partnership for 444 West Santa Clara Street LP. The transaction generated a pre-tax gain for SJW Land Company of $4.4 million and $1.9 million for the partnership's minority partner. Turning to our capital expenditure program, we added $34.3 million in company funded utility plant in the second quarter of 2017 bringing total company funded additions to $62 million year-to-date. This includes approximately $10 million spent on the Montevina treatment plant project. We expect to spend an additional $10 million on the Montevina project, during the remainder of 2017. Turning to liquidity, year-to-date 2017 cash flows from operations were consistent with the prior year at approximately $55 million. Operating cash flows include amounts we collected as drought surcharges under our drought shortage contingency plan through February 1 of 2017 at which time the surcharges were suspended. Amounts collected under the plan where initially recorded by the company as regulatory liabilities and then subsequently used to offset amounts authorized by the CPUC for recovery under the WCMA. As of June 30, 2017, all collected surcharge amounts have been applied to WCMA balances. At the end of the quarter, we had $145 million available on our bank lines of credit for short-term financing of utility plant additions and operating activities. With that, I will stop and turn the call back over to Rich. Rich?

Thank you, Jim. In response to Governor Brown's rescission of the Emergency Drought Declaration, the State Water Resources Control Board lifted mandatory conservation targets for urban water suppliers on April 26, 2017. The State Water Boards action kept in place water use reporting requirements and the pro-additions of wasteful water use. With key local and state reservoirs full and a Sierra Nevada Mountain snowpack that’s still persistent to July, California's water supply picture remains positive for this year and into next year. As Jim mentioned, our regional water supply agency, the Santa Clara Valley Water District has reiterated its call for 20% conservation and customer usage from 2013 levels. San Jose Water Company continues to track revenue lost due to conservation through its WCMA. The California public utilities commission recognizes that the states structural water supply issues present challenges to investor-owned water companies and the customers they serve. To that end, regulatory mechanisms such as the aforementioned WCMA are intended to track for future recovery, revenue lost due to mandated conservation, and other drought restrictions. These mechanisms are working as designed and are an important element in helping utilities encourage conservation, effectively manage the resulting lower customer usage and recover fixed cost needed to ensure the continued delivery of safe and reliable water service. However, I believe that in the final analysis and regardless of the mechanisms employed, authorized sales must more accurately reflect the structural reductions in customer usage. There continues to be regulatory support for infrastructure investments that ensure the continued delivery of safe high quality and reliable water service. SJW remains on track to invest a record $136 million this year in our water systems. San Jose Water Company $62 million Montevina Water Treatment Plant Retrofit project remains on schedule for completion in the fourth quarter of this year, and as Jim mentioned, we expect to begin processing available surface water in the fourth quarter of 2017. Other regulatory highlights for San Jose Water Company in the quarter included approval to reinstate surcharges to recover the remaining $3.2 million balance from the 2014 mandatory conservation revenue adjustment memorandum account and the 2015 WCMA. An application on June 6, 2017 requesting authorization to issue a [indiscernible] credit to refund service charge rate changes as a result of a change in billing practice effective January 1, 2017. The refund period covers prorated service charge rate changes that occur from January 1, 2014 through December 31, 2016. This application is pending before the commission and finally an approval to implement surcharges to offset the increases to wholesale water supply charges levied by the Santa Clara Water District effective July 1, 2017. Turning to Texas, we either received a $3 million non-refundable deposit on June 23, 2017 SJW achieved an important milestone concerned to an agreement to sell all of SJW's Groups equity interest and Texas Water Alliance Limited to the Guadalupe Blanco River Authority. TWA represents a crucial new water supply project for the region and the consummation of the agreement expected later this year will further demonstrate SJW's capability to take on complex water supply projects and partner with the public sector agencies to help sustain the region's economic vitality and quality of life. We also continue to be encouraged by the growth of SJWTX, Inc. The customer growth in our 244 square mile service area that borders part of the city of San Antonio is truly remarkable. National homebuilders have been attracted to the developments in our service area because in part of the depth and breadth of our water supply portfolio, and our ability to provide timely, cost-effective, and high quality water service. Since its acquisition in 2006, SJWTX has more than doubled in size from 6,500 connections to more than 13,000 connections with no indications of a slowdown. With its increased contributions to consolidated earnings, we remain optimistic about the prospects for SJWTX. It is also worth mentioning the growth occurring in San Jose metro area and Silicon Valley generally. Google/Alphabet and Adobe Systems recently announced plans to add a total of approximately 8 million square feet of commercial office space and 23,000 employees to various locations in downtown San Jose. Along with the office space and jobs, the project includes open areas for public recreation, entertainment and retail options and the potential to add over 2,500 units of high-rise high-density housing. Also funding has been secured to complete major mass transit improvements, including the electrification of Caltrain and the extension of BART or the Bay Area Rapid Transit system to the South Bay. In summary, SJW has two outstanding regional water utilities located in economically vibrant and growing regions. The prudent investments in our water systems facilitate the delivery of safe, high quality, and reliable water service at a reasonable price and augment the rate base that fuels our earnings. Our investments are enduring and we believe over the long haul they will deliver sustained growth and profitability, earnings, and dividends. 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 Michael Gaugler of Janney. Your line is open.

Good morning gentlemen.

Hi, Michael.

I missed this in your prepared remarks; you said customer usage is what percent below normal in California for your region?

Hi Michael this is Jim. It’s tracking right about 30% below our 2013 usage level and it’s about 20% below the amount authorized in our 2016 general rate case.

Okay. And - okay that’s good to know. The other item I wanted to ask you about was what you are seeing in Texas in terms of further acquisitions I know you said customer growth is doing nicely down there, but are there systems in the pipeline to buy in Texas?

Hi Michael it’s Rich, thanks. Yes there are. And we're working on, we have a couple of them that are near completion, at least one that is near completion and some others in the pipeline, but it takes a long time to get them done and they are going to be, they are not going to be huge acquisitions, but they will be continuing to add to the organic growth. They know these systems are in the 500, 600 connection area. So, we continue to see that, the growth down there is really remarkable and I still see quite a bit of opportunity for organic and acquisition growth. So, can't talk about specifics right now, but we do have a couple in the pipeline.

Okay and then one last one. On the real estate portfolio, I know you mentioned in the previous call you were looking to wind that down, how is that looking, is that a 2017 event, 2018 event to pretty much exit that business?

Mike, again this is Jim. What we have been doing is, we have been looking at the different geographies that we have income producing properties and as the situation within those markets have provided beneficial or proved beneficial to us to engage and transacting the properties that’s pretty much the approach we’ve taken. As you know, this year, in fact this past quarter transacted there are 444 West Santa Clara property and there were a number of reasons which proved beneficial for us to do that here. We’ve got one significant remaining income producing property in Tennessee and we certainly - that property continues to perform very well for us, but as we do with all of our properties, if it turns advantageous to us within the market to transact that then we will take a look at the opportunity to do so.

That's all I had gentlemen. Thank you.

Thank you.

Thank you. [Operator Instructions] And as there are no further questions in queue, I like to turn the call back over to Richard Roth for any closing remarks. Sir.

Thank you everyone for tuning in. We appreciate your interest in investment in SJW Group and look forward to talking to you at the end of the third quarter. Thank you.

Thank you, sir. And thank you ladies and gentlemen for your participation. That does conclude your program. You may disconnect your lines at this time. Have a wonderful day.