H2O America (HTO) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Full Year Fourth Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be a question and answer session. [Operator Instructions]. I would now like to hand the conference over, Suzy Papazian to proceed with today's call. You may proceed.

Thank you, operator. Welcome to the Full year and fourth quarter 2019 financial results conference call for SJW Group. Presenting today are Eric Thornburg, 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 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 could cause the company’s actual results and performance to differ materially from those expressed or implied by the forward-looking statements. For descriptions of some of the factor that could cause actual results to be different from statements and this presentation, we refer you to the financial results 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 on 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 April 27, 2020. You can access the press release and the webcast on our corporate website. I will now turn the call over to Eric.

Thank you, Suzy. Welcome, everyone and thank you for joining us. I’m Eric Thornburg, and It is my honor to serve as Chairman, President and CEO of SJW Group. Along with Suzy, I'm very pleased to be here with Jim Lynch, our Chief Financial Officer. As a result of our transformative combination with Connecticut Water, SJW is now the second largest pure play investor-owned water utility in the United States based on combined estimated rate base. Together, are over 700 dedicated and passionate water professionals deliver safe high-quality and reliable water and wastewater service to more than 1.5 million people in our local service area communities in California, Connecticut, Maine and Texas. We are well underway with executing on our integration plan and delivering the benefits of our transformative combination to all of our customers, communities, employees, the environment and our shareholders. Our internal integration management team has been hard at work to leverage the merger benefits for all of our stakeholders and subsidiaries and over 125 projects spanning all aspects of our operations have been identified to drive us forward as a combined company. Key initiatives include leveraging the increased scale of the combined organization and our strategic sourcing initiative with benefits starting in 2020, delivering on our 2020 business plan, successfully mapping data to allow for combined accounting processes and financial reporting, and establishing a supplier diversity program to further support our local communities in Maine and Connecticut and delivering on a regulatory commitment. We're excited about the future and believe that these as well as other integration initiatives that are well underway will deliver meaningful benefits to all of our stakeholders in 2020 and beyond. However, with all this progress comes costs related to the closing and integration. In connection with closing our transaction with Connecticut Water, we incurred merger and integration-related expenditures of $20.5 million net of tax or $0.72 per share in 2019. These expenses are nonrecurring include the cost of legal, financial and regulatory advisors, as well as regulatory commitments in Connecticut and Maine and other merger related expenses that are customary in combining two public together. While implementation of our integration plan is ongoing. We do not anticipate that significant expenditures for consultant support will continue in 2020. With help from our consulting partners, we completed planning and execution of day one activities necessary to ensure a seamless transition to our newly combined entity. Also our integration management team completed the longer-term planning necessary to efficiently leverage the benefits and strengths of our operating entities across the organization. We're incredibly proud of our employee teams and the partners we worked with throughout 2019 to achieve these milestones and position us for success as a combined organization. We are also very pleased to begin to move forward with a focus on realizing the combinations benefits for all of our stakeholders. Separate and apart from our merger we also incurred a significant nonrecurring charge of $6.7 million net of tax or $0.24 per share in 2019 related to the California PUC's decision to deny recovery of our 2018 Water Conservation Memorandum Account, WCMA balance and resend our use of the WCMA mechanism. While our local water agency, Valley Water continues its call for a 20% reduction in water use from 2013 levels. The CPUC concluded that since the reduction is no longer mandatory the mechanism is no longer needed. Since our 2019 California general rate case more closely aligned authorize usage with actual usage, we do not believe the loss of the mechanism will have a significant effect on future results. In light of the unique circumstances of this past year notably the significant impact of the nonrecurring merger and integration related expenses of $0.72 per share and the WCMA charge of $0.24 per share on 2019 earnings, we wanted to provide guidance for our shareholders and other stakeholders on our 2020 earnings to give you a clearer sense of the underlying strength of our company. Consistent with the consensus of analysts estimates, SJW Group expects earnings per share to be within the range of $2.25 to $2.35 per share for 2020. Jim will provide a detailed analysis of our financial performance in just a moment. But I wanted to first highlight a few additional milestones in 2019 outside of the merger. There were a number of accomplishments in 2019 that stand out, including investing over $138 million in our California and Texas water systems and over $25.9 million invested in our New England utilities since the closing, achieving world-class customer satisfaction levels or greater in Connecticut and Maine. Increasing community engagement and customer satisfaction levels in California through a revamped and expanded outreach program, celebrating a milestone agreement with the Coastal Mountain Land Trust in Maine to further demonstrate our reputation as a strong steward of the environment. Securing several legislative victories in Texas including fair market value legislation and the establishment of an infrastructure replacement surcharge. Being recognized by our peers and the EPA for our commitment to excellence for the design build with Montevina Water Treatment Plant project and for the advances in asset management and water treatment practices in San Jose, and in Connecticut for our water treatment practices and for our water safety education program. And another successful year of meeting high drinking water standards and environmental regulations, delivering on our commitment to public health and environmental stewardship, which we discussed in our new sustainability report issued on February 12 that is accessible on our website. These accomplishments demonstrate the strength of our teams and our ability to deliver results, reinforcing our confidence in our employees and our shared future. I'll turn the call over to Jim, who will review our financial results and 2020 forecast. After Jim's remarks, I will address regulatory and other business matters. Jim?

Thank you, Eric. As Eric mentioned our fourth quarter and annual operating results reflect the October 9, 2019 closing of our merger with Connecticut Water. With significant cost related to the transaction including the Connecticut and Maine customer credits now behind us, we look forward to 2020 and the benefits of a full year of activity from our new England operations. Our 2019 results also reflect the increased use of our California surface water supplies as well as the impact of writing off our 2018 and 2019 WCMA balances. As stated in our third quarter earnings call, the CPUC issued two conflicting proposed resolutions for the advice letter we filed requesting recovery of our 2018 WCMA balance. As a result the company established a reserve against the recorded balance. On December 19, 2019 the CPUC denied recovery of the balance citing the elimination of mandatory conservation requirements. To that end, use of the WCMA was rescinded effective January 1, 2018. Looking ahead, we believe the better [Indiscernible] achieved in San Jose Water 2019 general rate case between actual and authorized usage and greater recovery of our fixed cost in the service charge will minimize the need for the WCMA to achieve future authorized returns. The guidance we are providing for 2020 reflects this alignment and the higher fixed charge recovery by San Jose Water with no significant changes in customer usage. In addition, we have modeled an average year of surface water production and no change in our California cost of capital. In Connecticut, we consider the impact of our one-year regulatory stay out. And in Connecticut and Maine timely recovery of capital investments through our WICA and WISC mechanisms. In Texas we expect organic customer growth will continue at the same pace we experienced in 2019. Turning to the 2019 results. Fourth quarter revenue was $125.8 million, a $27.1 million increase over reported fourth quarter 2018 revenue of $98.7 million. Net loss for the quarter was $5.5 million or $0.19 per diluted share. This compares with $8.8 million of net income or $0.38 per diluted share in the fourth quarter of 2018. During the 2019 fourth quarter, increased usage contributed $0.14 per share and rate increases contributed $0.10 per share. These increases were offset by merger closing cost and integration planning cost of $0.30 per share, increased interest on long-term debt of $0.13 per share and a loss from net Connecticut water activity of $0.10 per share. In addition loss of the WCMA reduced net income by $0.09 per share and increase general and administrative expenses by $0.08 per share. Turning to our fourth quarter comparative analysis, the $27.1 million increase in revenue we experienced was primarily attributable to $21.7 million earned by Connecticut Water subsequent to the merger close, a $4.3 million increase in customer usage and $2.9 million in rate increases primarily attributable to pass-through water rates. These increases were partially offset by a $2.7 million decrease resulting from the rescission of the WCMA. Water production expenses increase $7.2 million compared to the fourth quarter of 2018. The increase was primarily due to $5.9 million in new expenses from the addition of Connecticut Water operations. Higher per unit cost for purchase water and power of $1.9 million and $1.5 million in higher customer usage. The expense increases were partially offset by a $2.6 million decrease in cost recovery balancing and memorandum accounts. Other operating expenses increased $31.3 million during the quarter as a result of $13.2 million in higher general and administrative expenses, $6.5 million in higher depreciation expenses and a $6 million increase in merger expenses related to the Connecticut Water acquisition. In addition, we incurred $3.4 million in higher property taxes and other non-income taxes and $2.2 million in higher maintenance expenses. Excluding merger cost, the increase in other operating expenses was primarily as a result of the inclusion of net Connecticut Water activities post acquisition and integration planning. Turning now to our annual result. 2019 revenue was [Indiscernible], a $22.8 million increase over the same period last year. Net income for the year was $23.4 million or $0.82 per diluted share compared to $38 million or 1.2 per diluted share in the same period in 2018. Diluted earnings per share for the year were positively impacted by the increased use of certain [Indiscernible] which contributed $0.29 per share and customer rate increases which contributed $0.28 per share. In addition, since San Jose Water balancing memorandum accounts contributed $0.24 per share and interest on money market fund contributed $0.17 per share. These increases were partially offset of the establishment the 2018 WCMA reserve which totaled $0.51 per share, a $0.29 per share increase in other production cost and an increase in depreciation and amortization cost of [Indiscernible] per share. In addition, interest on long term debt [Indiscernible] and higher administrative and general expenses increased $0.12 per share. Net Connecticut Water activity resulted in a loss of $0.08 per share and merger and integration related cost were $0.06 per share. The increased revenue was primarily attributable to the previously mentioned $21.7 million addition of Connecticut Water revenue, $11 million in cumulative rate increases and $6.4 million in customer credit established in 2018 related to the federal tax rate change. No similar credits were required in 2019. These increases were partially offset by the change in WCMA revenue of $19.8 million and a $2.1 million charge due to the proposed settlement we have with the CPUC on the San Jose Water customer billing matter. Water production expenses increased $7.1 million in 2019, the increase is primarily due to $12.1 million of higher per unit cost for water and power and $5.9 million in new expenses as a result of our Connecticut water merger. This increase was partially offset by an increase in the use in California of lower-cost surface water of $11.3 million. Other operating expenses increased $31.7 million in 2019 primarily due to $17.4 million in higher general and administrative expenses that include integration costs at $11 million in higher depreciation expenses, $4.1 million in higher taxes other than income taxes. In addition, those increases also were partially offset by $2.1 million in lower merger cost when compared to 2018. Other income and expense included $6.5 million of interest income earned on money market fund investments from the proceeds of the company's December 18 equity offering and $6.2 million in new interest expense accrued for the acquisition financing debt and new term debt taken out by our California operations. Turning to our capital expenditure program, we added $45.2 million in company-funded utility plant additions in the fourth quarter of 2019 bringing total company-funded additions for the year to $164.3 million. This includes $25.9 million of additions constructed by Connecticut Water entities in the fourth quarter. Our 2019 cash flows from operations increased $38.7 million or 42% over the same period in 2018, the increase was primarily the result of a $37.3 million increase in the collection of balancing the memorandum accounts, a $3.6 million increase in accrued production expenses and a $9.7 million increase in general working capital and net income, after adjustment for non-cash items. These increases were partially offset by $11.9 million decrease in the net collection of taxes receivable. On October 8th of 2019, SJW Group issued $510 million in unsecured senior notes with a maturity range of 10, 12 and 20 years at interest rates of 3.05%, 3.15% and 3.53% respectively. Proceeds from the note issuance were used to partially finance the merger with Connecticut Water. In addition, on March 28, 2019, San Jose Water issued $80 million in unsecured senior notes with 30-year lives at an interest rate of 4.29%. Proceeds from the note issuance were used to refinance short-term borrowing. At the end of the year we had $138 million available on our bank lines of credit for short-term financing of utility plan additions in operating activities. With that, I'll stop and turn the call back over to Eric.

Thank you, Jim. SJW Group continues to deliver on our core growth strategy of investing in high-quality water systems to provide safe and reliable water service to customers and communities and earning a fair return on those investments. In the last decade alone more than $1 billion has been invested in the local water systems of the communities we serve in California and Texas. And over the same period Connecticut Water has invested over $450 million in the local water systems of the communities it served in Connecticut and Maine. As well documented that our nation's water and wastewater systems are in need of significant investments. Utility regulators have historically recognized this need and accordingly have enabled regulated water utilities to make such investments. In 2020, SJW group subsidiaries plan to invest over $220 million in infrastructure improvements to serve our customers in California, Connecticut, Maine and Texas. In addition, in December of 2019 San Jose filed an application with the California Public Utilities Commission for the deployment of advanced metering infrastructure or smart water meters throughout its service area. Our filing seeks approval of capital investments of approximately $100 million over the next four years to install the network and meters by January 2025, AMI technology would allow our customers to manage their water use more efficiently through hourly meter reads and be alerted of leaks in a timely manner. This allows both utilities and customers to meet the state of California's policy of conservation as a way of life. And maintain our long-standing commitment to protect and preserve the environment and efficiently managed and protect the value of resource. Processing schedule anticipates a final decision from the CPUC by the end of 2020. In January of 2020 San Jose Water along with the three other Class A water utilities requested a one-year deferment on their cost of capital filings which would otherwise be due on May 1 of this year. Postponing the filing one year would alleviate administrative processing costs on utilities as well as the commission staff and provide relief for both commission and utility resources already strained by numerous other meetings. A commission decision on this request is expected shortly and we will course let you know when it's received. Looking ahead, Connecticut Water's first generate case since 2010 will be filed later this year with rates to take effect in the first quarter of 2021. In January 2020 we file or infrastructure surcharge through the water infrastructure and Conservation Adjustment Program or WICA in Connecticut. This request covers $20.4 million in qualified infrastructure investments with incremental annual revenue of $2.2 million. We expect a decision on his filing in late Q1 or early Q2. We are also preparing to file general rate case for San Jose Water in January 2021, which will establish rates for 2022 through 2024. Maine Water files for rates by operating division and currently has a general rate application filed for the Skowhegan division. Main Water also plans to file a general rate application for the Camden, Rockport division in the summer of 2020 for rates to take effect in 2021. Maine Water also filed annually for infrastructure surcharges for eligible projects to the water infrastructure surcharge program or WISC. Just this week Maine Water received approval from the main PUC for infrastructure surcharges in four divisions effective March 1, 2020, recognizing $4.3 million in critical infrastructure investment and increasing revenues by $367,000. These various filings include proposed capital investments that over the long-term benefit customers, communities and shareholders as they enhance SJW's ability to deliver safe, high-quality and reliable water service, while increasing rate base, the earnings engine for the company. Its worth noting that San Jose Water's current general rate case decision covering the years 2019 through 2021 not only established a three-year capital program of $320 million, but also increase the service charge and adjusted the level water sales necessary to deliver our revenue requirement, allowing for greater cost recovery from the fixed charge and high revenue stability overall. We saw the benefit of this in 2019 as actual usage aligned more closely with projected usage, validating our efficient regional utility business model and providing a realistic opportunity for the company to earn its authorized rate of return. Looking ahead I am optimistic about SJW Group's future success particularly now that the headwinds of merger costs and usage projections are largely behind us. To achieve our goals we're working diligently to support the growth of our Texas water utility which is nearly tripled in size through organic growth and acquisition since 2006. Increase our capital investments to deliver safe and reliable service, to our local communities and grow the rate base for all of our operating entities. Deliver the benefits of our transformative combination to all stakeholders and continue to seek acquisition opportunities that create value for our stakeholders. The prudent management of our business and financial resources continues to be fundamental to our growth and our ability to return capital to shareholders. Demonstrating the company strong commitment to our shareholders in January 2020, the Board authorized a 6.7% increase in SJW Group's 2020 dividend to $1.28 per share, as compared to the total dividends paid in 2019. This dividend increase brings us more in line with our target dividend payout of between 50% and 60% of recurring earnings. We're proud to have continuously paid a dividend for over 76 years and to have increased the annual dividend in each of the last 52 years delivering value to our shareholders. Lastly, I want to recognize some key executives who have retired after distinguished careers at San Jose Water. Dana Drysdale, our Vice President of Information Systems, Craig Giordano our Vice President of Engineering and Palle Jensen, Executive Vice President, are all exceptional water professionals who each share at least 25 years of service to the company and the industry. They are well recognized and respected by our peers and within the organization for their contributions and accomplishments in establishing SJW as an industry leader in the areas of information technology, engineering and regulatory affairs. We wish them all the very best. With that, I'd like to turn the call back to the operator for questions.

Very good. Thank you, operator. And thank you all on the call today for your participation. The SJW Group was founded 153 years ago, but we're just getting started. Our growth strategy, investing in our utilities and our earning a return, coupled with our acquisition track record demonstrates that we are executing on our growth plan. We look forward to 2020. Thank you very much.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone have a great day.