H2O America (HTO) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience. You've joined the SJW Group's First Quarter 2017 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference may be recorded. I would now like to turn the call over to your host, General Counsel, Ms. Suzy Papazian. Ma'am, you may begin.

Thanks, operator. Welcome to the First 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 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.sjwgroup.com.

All forward-looking statements are made as of today, and SJW Group disclaims any duty to update or revise such statements. You may have your 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 July 24, 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. I am Rich Roth, President, CEO and Chairman of SJW Group. On the call with me today are Jim Lynch, our Chief Financial Officer; and Palle Jensen, our Senior Vice President of Regulatory Affairs.

SJW's solid first quarter results reflect its strong fundamentals, constructive regulatory environments, and sound management. As stated on prior calls, SJW's emphasis remains on key tactical and strategic aspects of our business, the most important of those being capital investments and infrastructure. SJW's capital programs continue to enhance system reliability, improve customer service, and deliver growth in rate base as we make the infrastructure investments pursuant to a carefully designed, prudently administrated -- administered and California Public Utility Commission approved capital investment program.

Regulatory affairs. SJW continues to work with regulators to seek effective regulatory policies and mechanisms that support the delivery of high-quality, reliable water supplies and outstanding customer service, while ensuring our shareholders earn a reasonable return on their investment.

I will now turn the call over to Jim for a review and analysis of the Q1 financial results. After Jim's remarks, I will provide additional information on regulatory filings, water supplies and other key operational and business matters. Jim?

Thank you, Rich. Our first quarter operating results reflect the positive impact of rate increases in both California and Texas, and the mitigation of lower customer usage by our California water conservation decoupling mechanism, partially offset by higher water cost. First quarter revenue was $69 million, a 13% increase over the first quarter of 2016. Net income for the quarter was $3.7 million or $0.18 diluted earnings per share. This compares with $3.4 million or $0.16 diluted earnings per share for the first quarter of 2016. The net increase of $0.02 in diluted earnings per share for the quarter was primarily attributable to a $0.26 per share increase due to higher customer rates, a $0.03 increase due to net changes in the company's balancing and memorandum accounts, and a tax benefit of $0.02 per share related to the adoption of a new accounting principle. These increases were partially offset by higher wholesale water cost of $0.11 per share, a decreased use of low-cost surface water of $0.07 per share, and a decrease in water use of $0.05 per share.

The rate increases were primarily the result of the decision we received in the second quarter of 2016 on our 2015 California General Rate Case application. San Jose Water Company implemented an 8.6% rate increase at the beginning of the third quarter of 2016, and a 3.8% increase on January 1, 2017. The company also implemented a 6.7% rate increase effective July 1, 2016, to recover a 20% increase in purchased water cost and groundwater pump taxes implemented by the Santa Clara Valley Water District in July of 2016.

Total first quarter revenue recognized through our California Water Conservation Memorandum Account, or our WCMA, was $3.5 million. This included $1.4 million related to the 2016 WCMA to update the allocation of new customers between business and residential customer classifications. Recall that the WCMA is a decoupling mechanism designed to allow the company the opportunity to earn our authorized return, while promoting water conservation.

The higher water production expenses were primarily due to the previously mentioned district cost increases. In addition to the higher cost of purchased water and groundwater pump taxes, we experienced a decrease in the use of surface water, our least expensive source of water supply. During the quarter, our Montevina Water Treatment Plant remained off-line during the third and final phase of project construction. Recall that we were able to bring the plant online after completion of the second phase of construction in December of 2015. Through a combination of this and early-season 2016 rainfall, we were able to process 2.4 billion gallons of surface water through the first 6 months of 2016, prior to plant shut down for the third and final construction phase.

We anticipate the final construction phase will be completed in the fourth quarter of 2017, at which time we intend to begin processing our existing 2 billion gallons of stored surface water through the plan.

Customer water use in the first quarter trailed the first quarter of 2016 by 3%. This was primarily due to record rainfall in our California service area, coupled with the district's ongoing water use restrictions. In February of 2017, San Jose Water Company suspended its water allocation and drought surcharge programs, which should impact usage as we head into the summer months. Rich will provide more details on water supplies in his remarks to follow.

Turning to our capital expenditure program. We added $27.7 million in company-funded utility plant during the quarter. This represents 20% of our total 2017 planned capital expenditures. The combined authorized 2017 rate base for our California and Texas utilities is $697 million. This excludes the Montevina project, which has been constructed under a separate advice letter.

Turning to liquidity. First quarter 2017 cash flows from operations decreased 13% over the first quarter of 2016. The decrease was primarily the result of reduction in the collection of tax receivables, partially offset by an increase in the collection of accounts receivables. Also included in operating cash flows for the quarter was a collection of various balancing and memorandum accounts, including $3.7 million in collections from our 2012 and 2016 GRC true-ups. In addition, we collected $833,000 in cash from drought surcharges prior to suspension of the water allocation and drought surcharge programs.

At the end of the quarter, we had no balances owed under our bank lines of credit, giving us $145 million available for future short-term financing of utility plant additions and operating activities. The average borrowing rate on line of credit advances during the quarter averaged 1.96%.

And on a final note, in January of 2017, 444 West Santa Clara Street, L.P., an entity in which SJW Land Company holds a 70% limited partnership interest, entered into an agreement to sell its interest in the commercial building and land owned by the partnership and operated for approximately $11 million, plus a $725,000 holdback for remediation of an eroding creek bank adjacent to the property. The sale closed on April 6, 2017. In connection with the sale, the partnership recognized a gain of approximately $6.2 million.

With that, I will stop and turn the call back over to Rich.

Thank you, Jim. Let's turn our attention to water supply. California's water supply picture has dramatically improved, thanks to record precipitation. The majority of the state's major reservoirs are at levels that exceed historical averages, while the Sierra Nevada mountain snowpack is the highest ever recorded. Water deliveries from the state and federal water projects make up a large portion of Santa Clara County's water supply, and authorized deliveries have been increased to 85% and 100%, respectively, of contracted amounts. Additionally, local reservoirs are at capacity and our groundwater basins continue their rebound to normal levels.

On April 7, 2017, Governor Jerry Brown declared an end to the drought State of Emergency throughout most of California. The declaration rescinded the water supply reliability stress test and mandatory conservation standards for urban water agencies, while maintaining water reporting requirements and prohibition on wasteful practices. However, the Santa Clara Valley Water District, Santa Clara County's resource management agency, has continued to direct retail water utilities to achieve a 20% reduction in consumption from 2013 baseline levels. Accordingly, San Jose Water Company is continuing to ask its customers to achieve the district's conservation targets until they are lifted. As Jim noted, the company terminated its drought allocation and surcharge program effective February 1, 2017, in light of the much improved water supply outlook.

Now turning to regulation. The CPUC's regulatory framework continues to evolve and recognize the need for regulated water utilities to recover net revenue loss due to differences between authorized and actual sales resulting from structural changes to the state's water supplies, and to deal with the impacts of multiyear droughts. San Jose Water Company's Water Conservation Memorandum Account, or WCMA, continues to track and recover net sales lost due to conservation targets that remain in place in Santa Clara County. The WCMA records the net difference between actual and authorized sales, net of any water cost savings. This mechanism provides for [advice center] filings to recover such amounts, and thus, offers a realistic opportunity for the company to achieve authorized returns.

Other regulatory matters in the quarter included new rates effective March 20, 2017, reflecting a $5.3 million or about 1.5% increase in San Jose Water Company's revenue requirement for the calendar year 2016 planned additions to the Montevina Water Treatment Plant upgrade project, and the establishment of a memorandum account effective January 17 to track the additional cost associated with the newly required school-lead testing program.

On April 3, 2017, San Jose Water Company filed its cost of capital application with the commission, requesting a cost of capital determination for the period from January 1, 2018, through December 31, 2020. The application requests a return on equity of 10.75%, which reflects the returns recently granted to California energy utilities as well as the company's unique risk profile. We anticipate a decision in late 2017, with an effective date of January 1, 2018.

We're also preparing for the filing of San Jose Water Company's 2018 general rate case application, which will establish rates for 2019 through 2021. A preliminary application is expected to be submitted in November 2017, with the final application submission in the first week of January 2018.

I'd like to talk to you a little bit about value creation. San Jose Water Company is on track to invest more than $136 million in utility plant in 2017, which, when completed, bests the record of $129 million invested in 2016. It is worth noting that SJW has been able to fund this level of expenditures and growth in rate base, while providing high single digit dividend growth and maintaining its target capital structure. As these necessary capital expenditures are fully reflected in rates, they support future earnings and dividend growth.

Also, we've been very pleased with the performance of SJWTX Inc., our Texas water and wastewater utility. Annual growth and customer connections in SJWTX's service area is over 6% annually and is reflected in its increased contributions to consolidated earnings. Anyone familiar with the booming population and job growth now occurring along I35 and U.S. Highway 281 in between Austin and San Antonio understands the potential for continued customer growth and expansion in SJWTX's 244 square mile service area, located strategically between these 2 major transportation and growth corridors. A new satellite office was recently added on Highway 281 to better serve the company's expanding commercial and residential customer base. Strong organic customer growth, combined with consistent small water system acquisitions, should push SJWTX above 14,000 connections by year-end.

Let's turn our attention to sustainability. SJW has several ongoing initiatives that benefit customers and shareholders alike, which include: A fresh look like renewable energy generation at company facilities to lower energy consumption cost; an advanced metering infrastructure, or AMI pilot project to assess functionality and viability of various AMI solutions, provide better information to our customers, while enhancing our understanding of the customer needs and desires; proactively reduce water loss, while providing enhanced customer service and reduce billing complaints; water treatment plant enhancements that should maximize the use of locally available surface water are also being undertaken, as previously mentioned; enhanced cyber security measures to protect customers and company information are also being included in our initiatives, carefully assessing the advantage and disadvantage of moving key systems and data to the cloud as part of our IT -- ongoing IT improvement plan; improved planning, communication and cooperation with key vendors and contractors to ensure capital projects and other critical outside services are completed on-time and on budget and according to specifications; and finally, a comprehensive information governance initiative to reduce or eliminate redundant information and data, facilitate and thereby reduce the time and cost associated with record search and retrieval, and to better protect all records from damage or unintended use. We believe these and other similar initiatives will result in the better use of resources to sustain profitability, enhance customer service levels, protect the environment and improve employee productivity.

It is with deep appreciation and respect that SJW bids farewell to board member, Ron Moskovitz. Ron's long relationship with SJW, starting with service as outside counsel to the company, and then as a board member has been characterized by dedication and commitment that contributed greatly to SJW's growth and success. We wish him the very best in his future endeavors.

In summary, SJW remains an attractive investment with a focus on designing, building, and operating high-quality regional water service platforms that we believe will sustain attractive, long-term returns for our shareholders. Our investments are smart and enduring, and we are confident over the long haul that the investments we have made will contribute to growth in profitability, earnings and dividends.

With that, I'd like to turn the call back to the operator for questions.

(Operator Instructions) As there no questions in queue, I'd like to turn the call over to Rich Roth for any closing remarks. Sir?

Thank you. Thanks, everyone, for tuning in today and listening to the call. We appreciate your investment in SJW, and we look forward to talking to you at the end of the second quarter. Thank you.

Ladies and gentlemen, that does conclude the program. Thank you for your participation, and have a wonderful day. You may disconnect your lines at this time.