H2O America (HTO) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SJW Group's Third Quarter 2017 Financial Results Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Suzy Papazian, General Counsel. Ma'am, you may begin.

Thank you, operator. Welcome to the Third 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 statement. 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 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 29, 2018. You can access the press release and the webcast on 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 third quarter results reflect the strong fundamentals that are the foundation to the company's sustained growth and profitability. They include: one, a constructive regulatory environment recognizing the need for increased investments to ensure safe, high-quality and reliable water service; two, superb execution of our capital programs, delivering growth in consolidated rate base, the earnings engine of the company; three, effective regulatory policies and mechanisms that acknowledge structurally lower water usage and provide a realistic opportunity for the company to earn its authorized returns; and four, 2 outstanding regional water systems located in areas enjoying sustained population and economic growth that, in turn, provide robust platforms for continued growth in customers, utility plant and earnings.

Jim 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 regulatory filings, water supply and other key operational and business matters. Jim?

Thank you, Rich. Our operating results for the third quarter and year-to-date benefited from authorized rate increases and an increase in customer usage in both our California and Texas service areas. Third quarter revenue was $124.6 million, a 10.9% increase over the third quarter of 2016, and year-to-date, revenue was $295.7 million, a 13.6% increase over the same period last year.

Net income for the quarter was $19.5 million or $0.94 per diluted share. This compares with $19 million or $0.92 per diluted share for the third quarter of 2016. For the year, net income was $41.9 million or $2.03 per diluted share compared to $39.1 million or $1.90 per diluted share in 2016. The $0.02 increase in our quarterly diluted earnings per share was primarily due to rate increases of $0.31 per share and increased usage of $0.13 per share. These increases were partially offset by: higher production expenses of $0.25 per share due to higher per unit water cost and increased usage; lower balancing and memorandum account income of $0.08 per share, including income from our Water Conservation Memorandum Account, or our WCMA; and an increase in operating and other expenses of $0.09 per share. The $0.13 increase in year-to-date diluted earnings per share was driven by many of the same factors. The impact of customer rate increases was $1.01 per share and increased customer usage contributed $0.18 per share.

In addition, we recognized a gain on the sale of real estate of $0.15 per share and balancing and memorandum account activity, including the WCMA, of $0.12 per share. These increases were partially offset by a $0.72 per share increase in production expenses due to higher per unit water cost, less surface water and increased customer usage. In addition, in 2016, we recognized a $0.26 per share in California General Rate Case true-up revenue and a $0.09 gain on the sale of California Water Service Group stock, neither of which reoccurred in 2017. We also experienced an increase in administrative and general expenses of $0.11 per share due to higher labor expenses, higher regulatory fees and executive search-related fees and an increase in other expenses of $0.15 per share.

Rate increases for the quarter and year-to-date resulted in $10.6 million and $34.2 million, respectively, of additional revenue. The increases were primarily the result of the 2017 escalation increase authorized in our 2016 California General Rate Case decision of 3.8% and a 1.5% increase related to the completion of planned 2016 improvements at our Montevina Water Treatment Plant. In addition, rates increased due to the authorized recovery of Santa Clara Valley Water District's water cost increase. The district, our wholesale water provider in California, instituted a 9% cost increase for the purchased imported water and a 10% increase for groundwater pump taxes effective July 1 of 2017.

Customer usage increased 9.9% for the quarter and 6.8% year-to-date, contributing $4.5 million and $6.1 million in additional revenue, respectively. Despite these increases, in California, we continue to lag authorized usage due to ongoing water use restrictions and water conservation activities. Our California WCMA mechanism allowed us to recover $4.1 million in lost revenue during the quarter and $12.5 million in year-to-date as a result of such activities.

Water production expenses increased $8 million during the quarter and $24.3 million year-to-date. The cost increases were primarily due to the district's July 2017 rate hikes and a decrease in the use of low-cost surface water. Regarding surface water, our Montevina Water Treatment Plant has been offline this year 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 water currently stored in Lake Elsman, our source of water supply for the plant.

Other operating expenses increased $2.4 million for the quarter and $7.9 million year-to-date, primarily due to: labor expenses; regulatory cost increases, including executive search-related fees; and increased -- increases in depreciation and other taxes related to capital improvements. Other income and expense year-to-date includes a $6.9 million pretax gain we reported in the second quarter on the sale of 2 real estate properties in downtown San Jose. The transactions generated a pretax gain for SJW Land Company of $5 million and $1.9 million for the partnership's minority partner.

Turning to our capital expenditure program. We added $41.4 million in company-funded utility plant in the third quarter of 2017, bringing total company funded additions to $103.4 million year-to-date. This included approximately $15 million spent on the Montevina Water Treatment Plant project. We expect to spend an additional $6 million on the Montevina project during the remainder of 2017.

Turning to liquidity. Year-to-date, 2017 cash flows from operations increased 14% over 2016. The increase was primarily attributable to the net period-over-period change in income taxes payable of $21.2 million and a $10 million increase in other accruals, partially offset by $10.9 million in net income before noncontrolling interest after adjustment for noncash items and a $9.8 million reduction in amounts collected on various balancing and memorandum accounts and other changes in net regulatory assets. At the end of the quarter, we had $132 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.

Thank you, Jim. California's water supply outlook remains positive for the near term. However, the longer-term outlook is less certain as California's population and economy continue to grow and the state grapples with recurring droughts, climate change, environmental issues and the pursuit of cost-effective solutions to address the environmental health of the Sacramento-San Joaquin Bay Delta. Nearly half of Santa Clara county's water supply is delivered via the state and federal water projects, both of which depend on the Sacramento-San Joaquin Bay Delta.

As most of you know, there have been multiple attempts by the state of California to restore the bay delta's ecosystem and secure more reliable water supplies. Nevertheless, the state has yet to find a solution acceptable to the many and varied stakeholders. It is not surprising then that our wholesale water supplier, the Santa Clara Valley Water District, is maintaining their call for rigorous conservation measures, and accordingly, San Jose Water Company continues to track revenue lost to conservation through its Water Conservation Memorandum Account, or WCMA.

There continues to be regulatory support for infrastructure investments that ensure the continued delivery of safe, high-quality and reliable water service. As previously mentioned, SJW Group utility plant additions totaled a record $41.4 million in the third quarter and reflect the company's exceptional engineering design and construction capabilities. SJW Group remains on track to invest a record $136 million this year in our water systems.

San Jose Water Company is nearly finished with its $62 million Montevina Water Treatment Plant retrofit project, and we expect to begin processing water, surface water, in the fourth quarter of 2017. The new treatment plant will enhance San Jose Water Company's ability to take advantage of its low-cost, high-quality, local water supply and ensure compliance with increasingly stringent drinking water regulations.

As previously reported, SJW expects to consummate the sale of Texas Water Alliance Limited to the Guadalupe-Blanco River Authority in the fourth quarter of 2017, culminating a multiyear effort to secure additional water supplies for the region. SJW continues to demonstrate its ability to work with public partners to develop cost-effective, best-in-class water supply solutions to ensure reliable, long-term water supplies are available for current and prospective residential and business customers.

Looking to 2018 and beyond, SJW remains focused on executing its capital programs, improving efficiency in customer service levels through the effective use of technology, securing water supplies to accommodate economic and population growth in California and Texas and pursuing regulatory policies and mechanisms that help ensure SJW has a realistic opportunity to earn its authorized return.

Finally, I will be retiring as CEO effective November 5, 2017. For the last 27 years, it has been a distinct honor and privilege to be part of SJW's growth and success. The water utility business has changed greatly during my tenure at SJW. The company has faced and will continue to face challenges and opportunities in a world characterized by rapid technological change, growing demands on water supplies, serious environmental considerations and a dynamic regulatory construct that seeks to balance many critical and competing social and environmental issues.

SJW is well prepared to meet all these challenges with the effective application of technology, proactive and thorough infrastructure planning, a strong balance sheet and a talented workforce. SJW is characterized by a remarkably innovative and customer-centric culture that exists at every level of the organization. This culture is reflected in the trust that we have earned with shareholders, employees, customers and stakeholders. As a result, I am confident that SJW will continue to innovate and grow and prosper for many years to come.

Thank you for your investment in SJW. With that, I will turn the call back to the operator for questions.

(Operator Instructions) Our first question comes from the line of Michael Gaugler with Janney.

Just one question. I guess maybe because we're out here in the third quarter now, I'm looking at the year-to-date EPS bridge and the impact water production expenses have had and trying to think about Montevina coming back online here in the fourth quarter and how the expense ratio there might change in 2018 and perhaps any guidance you could give me on that.

So with regards to the remainder of the year, Michael, we're anticipating that Montevina will come online probably at the end of the year, sometime in December, where we see any meaningful production out of the plant. We are starting the year in '18 with some water supply up in Lake Elsman, so we should be able to take benefit of that. It's too soon really to tell whether or not it's going to be a rain -- a rainfall year that will result in additional water supplies that would meaningfully change our historical contribution from Elsman on a go-forward basis. But we do expect the plant to be operational as we move into 2018.

Is the reservoir full currently?

Currently, the reservoir is full, yes.

Okay. So you've got quite a supply there for the first half of the year.

We have about 2 billion gallons, which is a full reservoir. And again, we should begin to start processing some of that in December, but most of it will be available into '18.

Okay. Well, that was the only question I had on the quarter. Rich, it's been a pleasure.

Ditto that, Michael, and look forward to talk to you later. Thank you.

Sure.

(Operator Instructions) I'm showing no further questions at this time. I would now like to turn the call back to Rich Roth for any closing remarks.

Thank you, operator. And as previously announced, I will be retiring on November 5 as CEO, and Eric Thornburg will be joining the company as its new CEO on November 6. Many of you may know Eric. He has a long record in the water business. And at that point, feel free to call him and/or Jim Lynch for any questions or comments about the company.

Again, it's been a pleasure to work with all of you. So that concludes my remarks.

And then I just like to say, as Rich mentioned, he is retiring this year. Rich has been at the company since 1990. He served as our CEO since 1999. And just to remind our audience, during his tenure, SJW has experienced considerable growth, growth in terms of our customers, shareholder value and our geographic footprint.

It's truly been a pleasure to work alongside Rich on this journey. So on behalf of our entire staff and management and our Board of Directors, I want to personally thank Rich for his many contributions and wish him the best in his upcoming retirement.

So with that, I'll turn the call back over to Rich for a final goodbye.

Okay. Well, that's good enough for me. Final goodbye to everybody. Good luck to everyone, too, and that concludes the call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.