Q3 2019 Earnings Call
The 19, the financial results conference call at this time, all participants are any listen only mode.
That's the speaker presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone.
Please be advised that todays conference is being recorded if you acquire any further assistance. Please press star Zero I would now like to hand, the conference over to your Speaker today General Counsel Suzy Papazian.
Ma'am. Please go ahead.
Thank you operator welcome to the first quarter 2019 financial results conference call for a shaped up income presenting today are strong Bert chairman of the board President and Chief Executive Officer, and James Lynch, Chief Financial Officer for those who would like to follow along side the company their remarks are available.
On our website at Www dot as GW crew dotcom.
Before I begin today's presentation I would like to remind you did this presentation and we need a material posted on our website may contain forward looking statements.
These statements are based on estimates and assumptions made by the company in light of his experience historical trend current condition and expected future there were luqman as well as other factors that the company, but these are appropriate under the circumstances.
Many factors could cause the company's actual results performance to differ materially from those expressed or implied by the forward looking statements.
For a description of some of the factor that could cause actual results to be different from statements and this presentation were for you to the financial results press release and to our most recent forms 10-K 10-Q, an 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 as you that we proved disclaims any duty to update or revise such statements.
You have your opportunity set the question at the end of the presentation.
As a reminder of this webcast is being recorded an archive of the webcast will be available until January 27 2020.
Access the press release and webcast on our corporate website I will now turn to call over to Eric. Thank you Susie welcome everyone and thank you for joining US Hi, Merrick Thornburg, Chairman, President and CEO of SGW group.
Hi, some of you May know San Jose water company, our flagship water utility in California was incorporated on November 20, Onest 18, 66 to serve good and pure water to 400 customers.
Fast forward over a 150 years later on October nine 2019.
GW group completed our transformative combination with Connecticut water service Inc., forming the third largest pure play investor owned water utility based on rate base in the United States.
Together, we will serve more than 1.5 million people with over 700 employees across California, Connecticut, Maine and Texas.
The acquisition of Connecticut water brings together two organizations with a shared passion for delivering life sustaining high quality water and exceptional customer service all of the operating utilities under SGW group ownership.
San Jose Water Canyon Lake water.
An adequate water main water Avon water and heritage village water will continue to deliver outstanding customer service environmental stewardship and community support with all of our operations remaining locally based and locally managed just as it is today.
As a leading diversified water utility.
Each of the combined companies operating utilities will continue to be supported locally with state presidents charged with ensuring a safe and reliable water system building on our strong record of customer service, providing growth opportunities for employees and focusing on supporting our local communities we intend.
To deliver benefits by serving local communities, where the passionate dedicated dedicated team of locally based water professionals, who care for and are engaged in improving their local communities.
Delivering exceptional customer service through the sharing of systems best practices operational expertise and resources throughout the entire company.
Maintaining our longstanding commitment to environmental stewardship by operating in a manner that promotes water and energy conservation sourced protection and preservation of open space.
And fostering socially responsible programs and supporting the communities, where we live work and serve.
The combined company will be led by an experienced board of directors that leverages, the strengths and capabilities of its subsidiaries.
Three new members with whom I have had the pleasure to serve at Connecticut water had joined SGW. His board, adding strengthened diversity to our organization with their unique perspectives experiences and local knowledge of the communities they serve.
On behalf of the entire board, we welcome Marianne handily.
Heather Hunt and Carol Wallace and look forward to working with them.
Yes, JW group is now one of the few publicly traded companies with almost half of its board comprised of women.
SGW group's ability to deliver safe high quality and reliable water service is inextricably linked to the health of our environment, both locally and beyond.
As previously reported we reaffirmed our longstanding commitment to protecting and preserving our environment through the creation of a board sustainability Committee.
This committee provides guidance to the board on key aspects of our corporate social responsibility program, including health and safety environmental stewardship and water supply as we look to further cement our status as industry leaders and water treatment operations and service delivery.
We published our first corporate sustainability report in 2018 and continue to evaluate and deploy new technologies that will allow us to better serve customers communities and shareholders. While also protecting our environment.
We are executing our business plan investing and necessary infrastructure to provide safe and reliable water service to customers and communities and that earning a fair return on and of that investment.
In the last decade alone more than $1 billion has been invested in our water systems and the communities, we serve in California and Texas.
We also remain keenly focused on continuous improvements in our operations through the deployment of innovative technology prudent financial management.
And investments in our employees to deliver world class water service.
Our transformative combination with Connecticut water will be a big driver of our future success, but so will the various significant investments and other organic growth initiatives that are underway at SGW that should ultimately expand our footprint and build further scale.
The success of our business plan is evident and SGW strong record of returning capital to shareholders. We've continuously paid a dividend for over 75 years and the annual dividend has increased in each of the last 51 years, bringing us more in line with our target dividend payout.
Of between 50, and 60% of recurring earnings, thereby delivering long term value to our shareholders.
With that I'll now turn things over to Jim Lynch, who will provide you with a detailed review and analysis of the Q3 results and other financial commentary.
And after Jim's remarks, I'll provide additional information on regulatory and other business matters, Jim. Thank you Eric.
Much like the second quarter, our third quarter operating results reflect the positive impact of our 2019 general rate case, our GRC the increased use of California surface water supplies and a decrease in merger related cost incurred in connection with our Connecticut water merger.
Our results also reflect the impact of reserves established against amounts recorded in our 2018 and 2019 water conservation memorandum accounts or a WCS may and higher purchase water costs from the Santa Clara Valley water district or valley water.
Third quarter revenue was $114 million, a 10.9 million dollar decrease over reported third quarter 2018 revenue of 124.9 million.
Net income for the third quarter was $9.5 million or 33 cents per diluted share. This compares with $15.8 million or 76 cents per diluted share for the third quarter of 2018.
During the third quarter of 2019, the increased availability of surface water contributed 12 cents per share.
And the decrease in merger related costs contributed 17 cents per share.
These increases were offset by the change in our WCS may balance, including new reserves totaling 35 cents per share increased water production cost of 10 cents per share and a decrease in other items of six cents per share.
In addition dilution due to the common equity shares we issued in December of 2018 for the Connecticut merger was 21 cents per share.
On October four 2019, the California public Utilities Commission or the CPC issue to propose resolutions for an advice letter we filed in March of 2019 for recovery of our 2018 WCS balance.
The first proposed resolution approves recovery of the 2018 WCS may while the second denies balance recovery.
Both proposed resolutions appear on the Cpcs November 7th 2019 meeting agenda.
As a result of the conflicting proposals the company no longer meets the accounting probability of recovery criteria for alternative revenue programs and as fully reserved the 9.2 million.
Dollar WCS balance as of September 32019.
In addition, the company is fully reserved the 1.5 million in 2019 WCS balance.
Of note before consideration of the reserves the WCS may balance for the third quarter of 2019 and year to date 2019 had dropped to $900000 and $1.5 million, respectively from $4.1 million and 7.1 million.
$1, respectively for the same periods in 2018.
This decrease was due primarily to better alignment of authorized and actual usage in the 2019, GRC, coupled with better alignment of the customer rate structure with actual fixed and variable cost.
As a result, we anticipate that the WCS may well have a diminished impact on our future results.
Turning to our comparative analysis for the third quarter. The decrease in revenue was primarily attributable to a 13.7 million dollar change in the WCS may including the new reserves, which was partially offset by rate increases that added $1.3 million of new revenue compared to 2018.
And $900000 and new customer revenue, along with a net change in revenue balancing and memorandum accounts of $800000.
Water production expenses increased $1.2 million during the quarter compared to the third quarter of 2018.
The increase was primarily due to higher per unit costs for purchase water and power of $3.9 million a change in the cost recovery balancing and memorandum accounts of $1.3 million and $700000 and higher customer usage.
These increases were partially offset by an increase in the use of lower cost surface water supplies of $4.6 million.
Other operating expenses decreased $3.3 million during the 2019 third quarter due to a 6.5 $6.7 million decrease in merger expenses related to our Connecticut water transaction.
This was partially offset by $2 million and higher general and administrative expenses due primarily to increase integration and compensation costs and $1.4 million and higher depreciation related to utility plant additions.
Turning to the year to date results 2019 revenue was $294.6 million, a 1% decrease over the same period last year.
Net income for the year to date was $28.9 million or one dollar point over one per diluted share compared to $29.9 million or a dollar point 45 per diluted share during the same period in 2018.
Diluted earnings per share for the.
Three month for the year to date period were impacted by an increased use of surface water that provided 30 cents per share a decrease in merger related cost of 22 cents per share and rate increases of 20 cents per share.
In addition, certain balancing and memorandum accounts contributed 17 cents per share and interest on money market funds contributed 16 cents per share.
These increases were offset by the change in our WCS may balance, including new reserves totaling 43 cents per share a 20 cents per share increase in other production cost of 15 cents per share decrease in water usage and an increase in depreciation and amortization costs of 11 cents per share.
We also experienced an increase in various other items of 20 cents per share and dilution due to the common equity we issued in December 2018 for the Connecticut merger of 40 cents per share.
The decrease in revenue was primarily attributable to the change in the WCS may of $17.2 million, including the reserves.
$6 million decrease in customer usage, and a 2.1 million dollar change due to the OHAI customer credits I discussed on our second quarter call.
The decrease was partially offset by $10.4 million attributable to net changes in balancing and memorandum accounts 8 million up 8 million and cumulative rate increases and 2.6 million in revenue from new customers.
Water production expenses decreased $200000 in the first nine months of 2019.
The decrease was primarily due to an increase in the use of lower cost surface water of $11.9 million and a $2.3 million decrease in customer water usage.
This decrease was partially offset by $10.2 million of higher per unit costs for water and power and a 3.8 million dollar net increase in cost recovery balancing and memorandum accounts.
Other operating expenses increased $300000 in the first nine months of 22019, primarily due to $4.4 million in higher depreciation expense $4.2 million in higher general and administrative expenses and $700000 and higher taxes other than income taxes.
Partially offset by a decrease of $8.9 million and CTW us merger expenses.
The increase in general and administrative expenses was due primarily to annual wage increases and integration costs for the merger with CTW us.
Other income and expense included $6.3 million of interest income earned on money market fund investments from the proceeds of the company's December 2018 equity offering.
Now turning to our capital expenditure program, we added $38.8 million and company funded utility plan in third quarter of 2019, bringing totally company funded additions year to date to $101.1 million or approximately 70% of our planned capital spending for 2019.
Our year to date 2019 cash flows from operations increased 24% over the same period in 2018.
The increase was primarily the result of a 27.6 million dollar increase in the collection of balancing and memorandum accounts and a 3.3 million dollar increase in general working capital and net income after adjustment for noncash items.
These increases were partially offset by an $8 million decrease in net taxes payable and a $5.3 million decrease in previously build and accrued receivables.
At the end of the quarter, we had $83 million available on our bank lines of credit for short term financing of utility plant additions and operating activities with that I'll stop and turn the call back over to Eric. Thank you Jim before opening up the Florida questions I'd like to touch on a few developments in the third quarter.
Utility regulators across our organization have historically recognize the need for continued investments in water system infrastructure and accordingly have enabled our regulated water utilities to make those investments we're seeing the benefits of a strong and resilient water system in California.
Pacific gas and electric public safety power shut off program has impacted many communities in California, and San Jose water was not spared.
Because of the investments in our water system, we were able to continue to deliver reliable service. During the two recent psps events. Despite the lack of electrical power at more than 80 of our key water production and distribution facilities. This is a testament not only to the investments but.
Also our passion knowledgeable and dedicated team who worked around the clock to ensure we can continue to serve our customers and community.
As Jim noted in his remarks, we have established a reserve associated with the recoveries of San Jose Water is 2018, and 2019 WSE M- balances.
Two resolutions, one denying and one approving the recovery of the 2018 WCS may as filed in advice letter 532 are currently under review.
We believe the recovery is supported by commission and state policies and past Commission decisions approving recoveries for San Jose water for the years 2014 through 2017.
We note that this item is currently on the Commission's November the seventh agenda.
Looking ahead, we believe future financial results are less likely to be impacted by the situation that necessitated the filing of advice letter fivethree too.
San Jose water is final decision on his 2018 general rate case, covering the years 2019 to 21 lowered authorized sales to a level that aligns nicely with current actual consumption.
In addition, a shift in cost recovery, allowing 40% of total revenue to be collected through the fixed charge provides a realistic opportunity for the company to earn its authorized rate of return.
Other regulatory developments include approval of an increase to San Jose waters total 2019 authorized revenue requirement of $655000 for plant additions related to the Montevina water treatment plant upgrade project in 2018.
On September the 29, 2019 and rejection of San Jose water is request for the recovery of the Hydro generation research development and demonstration memorandum account balance of $1.2 million.
The Commission rejected the advice letter filings on October the 10th 2019.
Citing an error in the underlying commission decision and recommended a correction of the decision followed by a new filing for recovery.
San Jose water anticipates, the record will be corrected and the filing a new advice letter for the recovery in the fourth quarter.
STW success has and will continue to be measured by our ability to deliver safe high quality and reliable water and exceptional customer service.
Over the last year, we've significantly expanded our customer engagement program, telling our story and more importantly, hearing from our customers and stakeholders about what concerns that I'm happy to report that we are seeing the result of our efforts. Our recent annual customer service survey in California showed a mom.
Market improvement in customer satisfaction levels as compared to 2018.
Our customers give us positive ratings when it comes to reliability quality and our commitment to conservation.
They are top priorities include knowing that our water system is prepared for the future and ready for possible emergencies, while their biggest concern continues to be cost.
We recognize that there is more to do on this front and have initiated a customer experience project to further drive customer satisfaction levels.
Led by San Jose Waters, New Vice President of customer service Tricia Zach Horizon. This initiative will evaluate all facets of our customer service program. Our goal remains to serve customers are world class levels and clearly we are headed in the right direction.
As announced earlier today lowering Westbrook has been appointed President of Connecticut Water service effective December one 2019.
Following our tradition of having strong experienced and local leadership and our regional operations Marine is an accomplished 30 year veteran, Connecticut water as widely respected by regulators and officials at the state and national levels as well as amongst our peers within the company and industry.
I also want to thank David Benoit, who will be retiring as president of Connecticut water service after a distinguished 24 year career.
David's contributions and accomplishments are too numerous to list and we wish him the very best in his retirement.
Lastly, we would like to extend a warm welcome to president Marigold Thatcher to the California Public Utilities Commission and express our appreciation do outgoing President Michael Picker for his service, we look forward to working with President Badger and our colleagues and their staff to address the many water related issues.
Facing California is regulated water utilities.
I'm excited about the future of SGW group.
Our transformative combination with Connecticut water adds diversification and scale furthering our ability to serve customers communities and shareholders and the environment.
Over the long haul we remain confident in our ability to deliver sustained growth and profitability earnings and dividends.
Thank you for your continued support and trust and SGW and we'll be happy to answer any questions you might have.
As a reminder to ask the question you will need to press star one on your telephone to withdraw your question press the pound key.
Please standby, while we've compiled acuity roster once again that star one on your touched on telephone.
Our first question comes from the line of Durgesh Chopra of Evercore ISI. Your question. Please.
Hey, good morning view.
Good morning, and various how are you.
So.
Congrats and getting the deal.
We begin completion.
I wanted to kind of as Q.
On the on the write down that you took in the quarter than and related to the reserve you mentioned there were two commissioned rulings one in any one not.
What was the what was the rationale or reasoning behind.
The decision, which was not in the future of Q recovering those zones.
Well first of all let me be clear their proposed resolutions as opposed to.
Decisions they will be voted on and on November 7th.
By the commission after which we will we will find out what the decision is.
The rationale for.
Denying the proposed.
Or the proposed recovery was essentially focused on the fact that.
The drought.
Has not been.
Oh has been over a few wells since the governor declared it as such in 2016, Anna contention by the office of Ratepayer is advocate.
That the.
By allowing recovery the company would essentially be over earning.
Those those were essentially the two main points in the in the denial.
Proposed resolution.
And in in response to that quite frankly, even though the drought has been.
Declared.
Over since since April of 2017.
The Santa Clara Valley Water District still has in place a 20% call for conservation and many of the restrictions that were put in place by the state water resources control Board remain in place and so it's our contention that we continue to feel the influence.
Of the the drought through these restrictions and the WCS may was put in place to insulate. If you will the company from the impact of water restrictions.
And also to allow us to recover our our authorized return while at the same time promoting conservation. So from that perspective, we believe that the WCS may still has a purpose and there's still is functioning as it was intended to do so.
Okay.
Thanks, I guess just from whom.
Our standpoint here.
I guess, if you think about.
Correct me, if I'm wrong here, but it is the risk that.
You know you may not be able to book the WCS EMEA entries.
Going forward is the commission chooses so on the members. The deal that you provided early on is that the right to think about it.
Well the WCS may still remains a an active.
Balancing account or memorandum account for us that the.
Commission has not proposed at this point too.
Eliminate the the WCS may as a.
Mechanism that can be used by the company.
The reason, we put the reserves in place or because of the two proposed decisions. We don't meet one of the accounting criteria. So this is one of those situations where accounting and regulatory.
Practices.
Our intersecting and potentially leading to two different conclusions, we do still feel based upon the track record that we have in terms of collecting prior WCS balances.
That.
We have good standing in terms of requesting this particular balance and in that.
We will certainly support such as we move forward and go through the the commission approval process as far as going forward, though I would also like you to.
Would it take heed of some of my comments that I made this morning relative to and Eric made this morning relative to the effectiveness of the TWC may in terms of.
And the impact that conservation will have on our usage going forward and therefore.
The benefit that it would provide for us going forward.
Because of the.
Last or in the last general rate case because of the.
Change in the authorized usage, which drives our ability to recover our authorized return as well as the better alignment of our fixed and variable cost with our actual fixed and variable cost. We believe that moving forward. The WCS may well have a much less impact on the total revenue that.
We record.
Absent the even if we were to meet the probability criteria as as we move forward and I think thats demonstrated by the fact that in the quarter. We only had about a 900000 dollar benefit absent. The reserve we would have only have had a $900000 benefit from the W.
May.
We get to technical on the response it I'd be happy to give you some additional information on it.
Offline, but.
The long and short of it is.
In the general rate case, we were able to get as part of our.
Initial.
Rate increase the mid year adjustment for the Santa Clara Valley water cost so the Santa Clara Valley water cost were included in beginning rates.
For the first two quarters.
And then when the actual rate went into effect in the third quarter.
It it the water cost full impact was was reported there where in the.
The first two quarters the.
The rate increase associated with that water cost.
Had already been put in place and we stand simply put the difference into a balancing account that were reversing out so you're not going to see it in the change in rates, but what you're going to see it is that impact but have been included in the change in the balancing accounts.
Okay, yes might be useful.
After the call on that.
Yes, I guess, the long and short of it is it's just the way that we were allowed the rate increase for the district in the first year of the the general rate case, that's that's the long and short of the answer and I'd be happy to walk you through it.
Yes, Okay, yes, I was kind of thinking.
Right.
6.7 million recorded during the first half of the year would imply another.
All right and a half 10 million during the second half of your pickup there.
But it sounds like that may not be okay.
Well, yes, we will in fact.
We are on track to as I said, if you if you listen to where we are relative to our usage numbers, we are pretty well on track to hitting our authorized revenue number. It's just that geography of where that is represented in the change over the quarter.
Okay, and you said on the residential side, what was the usage compared to where we were up about 4% on the on the quarter.
Okay and your year to date.
For 4% up on the residential 5% balance.
Yes, thats about right.
Okay.
And then I think it was in your proxy as indicated that 2021, yes, you have projected to 43 is that still accurate and then should we expect the mid to high single digit accretion from.
Good water deal off of that.
43 Standalone basis.
Yes, I think we're pretty pretty.
A comfortable with that for.
For 2020.
Yes.
You mentioned 2020 right that was in 2019, that's 2020 I think it was 2021 the.
Yes, yes, yes, that's down Thats sounds right for 2021, yes.
Okay. So.
Yeah.
That's helpful off and then.
Also help me understand your production expenses, what caused the 1.3 million increase and.
Cost recovery balancing that balancing and memorandum account.
3.8 year to date.
I can offsetting the revenue.
A recognition there anything.
Income neutral or or what are those items government.
Yes, so so.
Anything absent an increasing customer usage is driven primarily by by two things one one is.
Within rates, we have the increase in cost from the from the water district.
Either through pumping or the pump tax or the the actual purchase of imported water and that's covered by the fit the general rate case as I mentioned earlier.
In addition, we did have some incrementally higher costs relative to the treatment of water coming out of our montevina water treatment plant.
And those costs were really driven by the fact that because we are treating more brackish water, it's costing us more to dispose of the the particulates that we take out of the out of the plant. So those are really the things that are driving the higher water cost and you really have to take a look at that relative to.
The to the.
Fact that we're also getting more water out of that plant.
Okay.
Offsetting.
Yes, that's all I have.
Yes, Jim if we could follow up on on the first point of view of useful. Thank you.
You bet very good.
Thank you at this time I'd like to turn the call back over to number for any closing remarks actually I'm sorry, we do have follow up question from us. So I guess kopra of Evercore ISI. Your line is open.
You guys, sorry, I forgot your dollars in the first thing any just any commentary on the.
Forward looking guidance and when might that.
We expect now that the mergers closed.
Hi, I'm sorry on forward looking items, you're talking about just generally how we.
Season.
As or like your peers some of your peers, but okay gotcha.
Thank you for the long term growth something like that along those lines.
Yes, I appreciate the question and we we have received that a lot we understand that that would that would be of a benefit to our analysts and investors and we are considering that end our board to we've.
Putting the two companies together it is truly transformative and we want to make sure that we're able to give you real good clear sight forward and we're working on that we would expect to be out of you know in December and January on some investor meetings, and we will do everything we can do give you give you a strong.
Sense of our of our forward momentum there and how we're doing.
Excellent. Thank you guys.
You bet.
Thank you at this time I'd like to turn the call over to Achterberg for any closing remarks Sir.
Yes. Thank you operator, thank you everyone for joining the call today. We appreciate your interest in SJ group and your support we continue to focus on executing our growth strategy to invest in return and earn a return on our investment in infrastructure to continue our acquisition program going forward into applied.
Services to other utilities.
As part of our core business strategy. So.
We continue to look forward to the future. We're very excited about our new company in the additional diversification that we've achieved to not just in service territory, but and regulatory environments and and economic environment and we're very excited about having this this.
Merger concluded and getting forward. So thank you again for your for your interest in our company.
Ladies and gentlemen does concludes today's conference call. Thank you for participating you may now disconnect.
[noise].
Ladies and gentlemen, thank you for standing by and welcome to ask JW Group Q3, 2019 financial results Conference call.
At this time off that's been Sarnia listen only mode.
So to speak a presentation there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone.
Please be advised that todays conference is being recorded.
If you acquire any further assistance please press star zero.
I like to hand, the conference over to your speaker today.
Council Suzy papazian.
Please go ahead.
Thank you operator welcome to the first quarter 29, Chief Financial results Conference call for as GW crew.
Presenting today are Earth strong Bert Chairman of the Board, President and Chief Executive Officer, and James Blanche Chief Financial Officer for those who would like to follow along slides to accompany their remarks are available on our website at www dot as GW crew dot com.
Before we begin today's presentation I would like to remind you that this presentation or we need a material 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 unexpected future developments as well as other factors that the company, but these are appropriate under the circumstances. Many factors could cause the company's actual results performance to defer mature.
Early from those expressed or implied by the forward looking statements.
For a description of some of the factor that could cause actual results with different from statements and this presentation work for you to the financial results press release and to our most recent forms 10-K 10-Q, an 8-K filed with the Securities and Exchange Commission copies of which may be obtained on our website.
All forward looking statements are made us up to date and as you they'll be group disclaims any duty to update or revise such statements.
Have you for a change he said questions at the end of the presentation.
As a reminder, disgust is being recorded an archive of the webcast will be available until January 27 2020.
You can access the press release of the webcast on our corporate website I will now turn the call over to Eric. Thank you Susie welcome everyone and thank you for joining US Hi, Merrick, Farnborough, Chairman, President and CEO of SGW group.
Some of you May know San Jose water company, our flagship water utility in California was incorporated on November 21st 18, 66 to serve good and pure water to 400 customers.
Fast forward over 150 years later on October nine 2019, SGW group completed our transformative combination with Connecticut water service Inc., forming the third largest pure play investor owned water utility based on rate base in the United States.
Together, we will serve more than 1.5 million people with over 700 employees across California, Connecticut, Maine and Texas.
The acquisition of Connecticut water brings together two organizations with a shared passion for delivering a life sustaining high quality water and exceptional customer service all of the operating utilities under SGW group ownership, San Jose Water Canyon Lake water, Connecticut water.
Main water Avon water and heritage village water, well continue to deliver outstanding customer service environmental stewardship and community support with all of our operations remaining locally based and locally managed just as it is today.
As a leading diversified water utility each of the combined companies operating utilities will continue to be supported locally with state presidents charged with ensuring a safe and reliable water system building on our strong record of customer service, providing growth opportunities for our employees and folks.
Missing on supporting our local communities, we intend to deliver benefits by serving local communities, where the passion dedication dedicated team of locally based water professionals, who care for in our engaged in improving their local communities.
Delivering exceptional customer service through the sharing of systems best practices operational expertise and resources throughout the entire company.
Maintaining our longstanding commitment to environmental stewardship by operating in a manner that promotes water and energy conservation source protection and preservation of open space.
And fostering socially responsible programs and supporting the communities, where we live work and serve.
The combined company will be led by an experienced board of directors that leverages, the strengths and capabilities of its subsidiaries.
Three new members with whom I have had the pleasure to serve in Connecticut water had joined SGW his board, adding strengthen diversity to our organization with their unique perspectives experiences and local knowledge of the communities they serve.
On behalf of the entire boards, we welcome Marianne handily.
Heather Hunt and Carol Wallace and look forward to working with them.
Yes, JW group is now one of the few publicly traded companies with almost half of its board comprised of women.
SGW group's ability to deliver safe high quality and reliable water service is inextricably linked to the health of our environment, both locally and beyond.
Previously reported we reaffirmed our longstanding commitment to protecting and preserving our environment through the creation of a board sustainability Committee.
This committee provides guidance to the board on key aspects of our corporate social responsibility program.
Including health and safety environmental stewardship, and water supply as we look to further cement our status as industry leaders and water treatment.
Operations and service delivery.
We published our first corporate sustainability report in 2018 and continue to evaluate and deploy new technologies that will allow us to better serve customers communities and shareholders. While also protecting our environment.
We are executing our business plan investing a necessary infrastructure to provide safe and reliable water service to customers and communities and that earning a fair return on and of that investment.
In the last decade alone more than $1 billion has been invested in our water systems and the communities, we serve in California and Texas.
We also remain keenly focused on continuous improvements in our operations through the deployment of innovative technology prudent financial management.
And investments in our employees to deliver world class water service.
Our transformative combination with Connecticut water will be a big driver of our future success, but several of the various significant investments and other organic growth initiatives that are underway at SGW that should ultimately expand our footprint and built further scale.
The success of our business plan is evident and SGW strong record of returning capital to shareholders. We've continuously paid a dividend for over 75 years and the annual dividend has increased in each of the last 51 years.
Bringing us more in line with our target dividend payout of between 50, and 60% of recurring earnings, thereby delivering long term value to our shareholders.
With that I'll now turn things over to Jim Lynch, who will provide you with a detailed review and analysis of the Q3 results and other financial commentary.
And after Jim's remarks, I'll provide additional information on regulatory and other business matters, Jim. Thank you very much.
Much like the second quarter, our third quarter operating results reflect the positive impact of our 2019 general rate case, our GRC the increased use of California surface water supplies and a decrease in merger related cost incurred in connection with our Connecticut water merger.
Our results also reflect the impact of reserves established against amounts recorded in our 2018 end 2019 water conservation memorandum accounts or WCS may and higher purchase water costs from the Santa Clara Valley water district or valley water.
Third quarter revenue was $114 million, a 10.9 million dollar decrease over reported third quarter 2018 revenue of 124.9 million.
Net income for the third quarter was $9.5 million or 33 cents per diluted share.
This compares with $15.8 million or 76 cents per diluted share for the third quarter of 2018.
During the third quarter of 2019, the increased availability of surface water contributed 12 cents per share and the decrease in merger related costs contributed 17 cents per share.
These increases were offset by the change in our WCS may balance, including new reserves totaling 35 cents per share increased water production cost of 10 cents per share and a decrease and other items of six cents per share. In addition dilution due to the common equity shares we issued in December of two.
2018 for the Connecticut merger was 21 cents per share.
On October four 2019, the California public Utilities Commission or the CP, you say issue to propose resolutions for an advice letter we filed in March of 2009 chain for recovery of our 2018 WCS may balance.
The first proposed resolution approves recovery of the 2018 WCS may while the second denies balance recovery.
Both propose resolutions appear on the Cpcs November 7th 2019 meeting agenda.
As a result of the conflicting proposals the company no longer meets the accounting probability of recovery criteria for alternative revenue programs and as fully reserved the 9.2 million.
Dollar WCS balance as of September 32019.
In addition, the company has fully reserved the 1.5 million 2019 WCS balance.
Of note before consideration of the reserves the WCS may balance for the third quarter of 2019 and year to date 2019 had dropped to $900000 and $1.5 million respectively.
From $4.1 million and $7.1 million, respectively for the same periods in 2018.
This decrease was due primarily to better alignment of authorized an actual usage and the 2019 GRC coupled with better alignment of the customer rate structure with actual fixed and variable cost.
As a result, we anticipate that the WCS may well have a diminished impact on our future results.
Turning to our comparative analysis for the third quarter. The decrease in revenue was primarily attributable to a 13.7 million dollar change and the WCS may including the new reserves.
Which was partially offset by rate increases that added $1.3 million of new revenue compared to 2018, and $900000 and new customer revenue.
Along with a net change in revenue balancing and memorandum accounts of $800000.
Water production expenses increased $1.2 million during the quarter compared to the third quarter of 2018.
The increase was primarily due to higher per unit cost for purchase water and power of $3.9 million a change in the cost recovery balancing and memorandum accounts of $1.3 million and $700000 in higher customer usage.
These increases were partially offset by an increase in the use of lower cost surface water supplies of $4.6 million.
Other operating expenses decreased $3.3 million during the 2019 third quarter due to a 6.5 $6.7 million decrease in merger expenses related to our Connecticut water transaction.
This was partially offset by $2 million in higher general and administrative expenses.
Turning to the year to date results 2019 revenue was $294.6 million, a 1% decrease over the same period last year.
Net income for the year to date was $28.9 million or one dollar 0.01 per diluted share compared to $29.9 million or one dollar point 45 per diluted share during the same period in 2018.
Diluted earnings per share for the.
Three month for the year to date period were impacted by an increased use of surface water that provided 30 cents per share.
Decrease in merger related cost of 22 cents per share and rate increases of 20 cents per share.
In addition, certain balancing and memorandum accounts contributed 17 cents per share and interest on money market funds contributed 16 cents per share.
These increases were offset by the change in our WCS may balance, including new reserves totaling 43 cents per share.
20 cents per share increase and other production cost of 15 cents per share decrease in water usage and an increase in depreciation and amortization costs of 11 cents per share.
We also experienced an increase in various other items of 20 cents per share and dilution due to the common equity we issued in December 2018 for the Connecticut merger of 40 cents per share.
The decrease in revenue was primarily attributable to the change in the WCS may of $17.2 million, including the reserves.
$6 million decrease in customer usage, and a 2.1 million dollar change due to that all III customer credits I discussed on our second quarter call.
The decrease was partially offset by $10.4 million attributable to net changes in balancing and memorandum accounts 8 million up 8 million and cumulative rate increases and 2.6 million in revenue from new customers.
Water production expenses decreased $200000 in the first nine months of 2019.
The decrease was primarily due to an increase in the use of lower cost surface water of $11.9 million and a $2.3 million decrease in customer water usage.
This decrease was partially offset by $10.2 million of higher per unit costs for water and power and a 3.8 million dollar net increase in cost recovery balancing and memorandum accounts.
Other operating expenses increased $300000 in the first nine months of 22019, primarily due to $4.4 million in higher depreciation expense $4.2 million in higher general and administrative expenses and $700000 and higher taxes other than income taxes.
Mostly offset by a decrease of $8.9 million and Cws merger expenses.
The increase in general and administrative expenses was due primarily to annual wage increases and integration costs for the merger with Cws.
Other income and expense included $6.3 million of interest income earned on money market fund investments from the proceeds of the company's December 2018 equity offering.
Now turning to our capital expenditure program, we added $38.8 million and company funded utility plan and third quarter of 2019, bringing totally company funded additions year to date to $101.1 million or approximately 70% of our planned capital spending for 2019.
Our year to date 2019 cash flows from operations increased 24% over the same period in 2018.
The increase was primarily the result of a 27.6 million dollar increase in the collection of balancing and memorandum accounts and a 3.3 million dollar increase and general working capital and net income after adjustment for noncash items.
These increases were partially offset by an $8 million decrease in net taxes payable and a $5.3 million decrease in previously built and accrued receivables.
At the ended the quarter, we had $83 million available on our bank lines of credit for short term financing of utility plant additions and operating activities with that I'll stop and turn the call back over to Eric. Thank you Jim before opening up the Florida questions I'd like to touch on a few developments in the third quarter.
Utility regulators across our organization have historically recognize the need for continued investments and water system infrastructure and accordingly have enabled our regulated water utilities to make those investments we're seeing the benefits of the strong and resilient water system in California.
Pacific asset Electrics public safety power shut off program has impacted many communities in California, and San Jose water was not spared.
Because of the investments in our water system, we were able to continue to deliver reliable service. During the two recent psps events. Despite the lack of electrical power at more than 80 of our key water production and distribution facilities. This is a testament not only to the investments but.
Also our passionate knowledgeable and dedicated team who worked around the clock to ensure we can continue to serve our customers and community.
As Jim noted in his remarks, we have established a reserve associated with the recoveries of San Jose Water is 2018, and 2019 WSE M&A balances.
Two resolutions, one denying and one approving the recovery of the 2018 WCS may as filed an advice letter 532 are currently under review.
We believe the recovery is supported by commission and stay policies and pass commission decisions approving recoveries for San Jose water for the years 2014 through 2017.
We note that this item is currently on the Commission's November the seventh agenda.
Looking ahead, we believe future financial results are less likely to be impacted by the situation that necessitated the filing of advice letter fivethree too.
San Jose water is final decision on its 2018 general rate case, covering the years 2019 through 21.
Lowered authorized sales to a level that aligns nicely with current actual consumption.
In addition, a shift in cost recovery, allowing 40% of total revenue to be collected through the fixed charge provides a realistic opportunity for the company to earn its authorized rate of return.
Other regulatory developments include approval of an increase to San Jose waters total 2019 authorized revenue requirement of $655000 for plant additions related to the Montevina water treatment plant upgrade project in 2018 to.
Over the 29 2019.
And rejection of San Jose water is request for the recovery of the Hydro generation research development and demonstration memorandum account balance of 1.2 million.
The Commission rejected the advice letter filings on October the 10th 2019, citing an error in the underlying commission decision and recommended a correction of the decision followed by a new filing for recovery San Jose water anticipates, the record will be corrected and.
The filing a new advice letter for the recovery in the fourth quarter.
STW success has and will continue to be measured by our ability to deliver safe high quality and reliable water and exceptional customer service over the last year, we've significantly expanded our customer engagement program, telling our story and more importantly, hearing from our customers and stakeholders.
About what concerns that.
I'm happy to report that we are seeing the result of our efforts. Our recent annual customer service survey in California showed a market improvement in customer satisfaction levels as compared to 2018.
Customers give us positive ratings when it comes to reliability quality and our commitment to conservation.
They are top priorities include knowing that our water system is prepared for the future and ready for possible emergencies, while their biggest concern continues to be cost.
We recognize that there is more to do on this front and have initiated a customer experience project to further drive customer satisfaction levels.
Led by San Jose Waters, New Vice President of customer service Tricia Zach Horizon. This initiative will evaluate all facets of our customer service program.
Our goal remains to serve customers are world class levels and clearly we are headed in the right direction.
As announced earlier today lowering Westbrook has been appointed President of Connecticut Water service effective December one 2019.
Following our tradition of having strong experienced and local leadership in our regional operations.
Marine as an accomplished 30 year veteran, Connecticut water as widely respected by regulators and officials at the state and national levels as well as amongst our peers within the company and industry.
I also want to thank David Benoit, who will be retiring as president of Connecticut water service after a distinguished 24 year career.
David's contributions and accomplishments are too numerous to list and we wish him the very best in his retirement.
Lastly, we would like to extend a warm welcome to President Maribel Thatcher to the California Public Utilities Commission and express our appreciation do outgoing President Michael Picker for his service, we look forward to working with President Badger and our colleagues and their staff to address the many water related issues.
Facing California is regulated water utilities.
I'm excited about the future of SGW group.
Our transformative combination with Connecticut water adds diversification and scale furthering our ability to serve customers communities and shareholders and the environment.
Over the long haul we remain confident in our ability to deliver sustained growth and profitability earnings and dividends. Thank you for your continued support and trust and SGW and we'll be happy to answer any questions you might have.
As a reminder, its ask the question you will need to press star one on your telephone.
To withdraw your question press the pound.
Please standby, while we've compiled acuity roster once again that star one on your touched on telephone.
Our first question comes from the line of Durgesh Chopra.
Evercore ISI your question please.
Good morning.
Good morning, and various Oreo.
So.
Where's congrats and getting the the deal.
Thats right.
Just I wanted to kind of as skew.
On the on the write down that you took in the quarter than.
The reserves.
Mentioned there were two commissioned rulings one and say we won not what was the what was the rationale or reasoning behind.
The decision, which was not in favor of Q recovering.
Loans.
Well first of all let me be clear their proposed resolutions as opposed to.
Decisions they will be voted on and on November 7th.
By the commission after which we will we will find out what the decision is.
The rationale for.
Denying the proposed.
Or the proposed recovery was essentially focused on the fact that.
The drought.
Has not been.
Oh has been over a few wells since the governor declared at as such in 2016, Anna contention Vivee office of Ratepayer is advocate.
That the.
By allowing recovery the company would essentially be over earning.
Those those were essentially the two main points in the in the denial.
Propose resolution.
And in response to that quite frankly, even though the drought has been.
Declared.
Over a sense since April of 2017.
The Santa Clara Valley Water District still has in place a 20% call for conservation and many of the restrictions that were put in place by the state water resources control board remain in place and so its arc intention that we continue to feel the inflow on.
Of the the drought through these restrictions and the WCS may was put in place to insulate. If you will the company from the impact of water restrictions.
And also to allow us to recover our our authorized return while at the same time promoting conservation. So from that perspective, we believe that the WCS may still has a purpose and there's still as functioning as it was intended to do so.
Thanks, I guess just from whom.
Our standpoint here.
I guess, if you think about.
Correct me, if I'm wrong here, but it is at risk that.
You may not be able to book the Blue cm entries going forward is the commission chooses so on the members. The that you provided early on is at the right to think about it.
Well the WCS may still remains a an active.
Balancing account or memorandum account for us that fee.
Commission has not proposed at this point to.
Eliminate the Pwc may as a.
Mechanism that can be used by the company.
The reason, we put the reserves in place our because of the two proposed decisions. We don't meet one of the accounting criteria. So this is one of those situations where accounting and regulatory.
Practices are intersecting and potentially leading to two different conclusions, we do still feel based upon the track record that we have in terms of collecting prior WCS balances.
That.
We have good standing in terms of requesting this particular balance.
And in that.
We will certainly support such as we move forward and go through the the commission approval process as far as going forward, though I would also like you to.
Kind of take heed of some of my comments that I made this morning relative to and Eric made this morning relative to the effectiveness of the WCS may in terms of.
And the impact that conservation will have on our usage going forward and therefore.
The benefit that it would provide for us going forward.
Because of the.
Last or in the last general rate case because of the.
Change in the authorized usage, which drives our ability to recover our authorized return as well as the better alignment of our fixed and variable costs with our actual fixed and variable cost. We believe that moving forward. The WCS may well have a much less impact on the total revenue.
We record absent the even if we were to meet the probability criteria as well as we move forward and I think thats demonstrated by the fact that in the quarter. We only had about a 900000 dollar benefit absent. The reserve we would have only have had a $900000.
Benefit from the WCS may as compared to last year's third quarter, where that number was about $4.1 million.
That $900000 than a pretax number.
Yes, Thats a pretax number.
That's Q3 2019.
Thats correct.
Okay. Thank you so much appreciated the color.
You bet executive.
Thank you. Our next question comes from Us on those.
On our asset management your line is open.
Hi, Good morning, gentlemen, on WPC I may four 2019, and Jim you alluded to it on a dollar basis, which was very helpful. So thank you for that my follow up is on a per customer usage bases. So for 20.
19 can you help us understand how is your actual usage on a per customer base is tracking versus the usage level embedded in your new rates like one or the actual levels on a CCF basis for both.
So so I can't give it to you CCF basis.
On a bank. Thank you for your question.
But what I can tell you is that we are.
My recollection is correct were about 4% ahead in the quarter.
For our residential customer usage and were about 5%.
Hi, and in our business usage for the quarter and just to to put that in a little perspective about.
60% of our total revenue is generated from our residential customers and about 40% has generated from our business customers.
Okay. Thank you appreciate it Jim.
Yep.
Thank you. Our next question comes from Michael Gaugler.
Jana Mcglamery Scott Your line is open.
Good morning, everyone.
Hey, Michael Michael.
Okay.
On further merger cost I think you said it was a nickel in the third quarter.
Any idea what we could be looking at in terms of fourth quarter.
Well, we do have two fairly larger expenses related to the merger that are still outstanding one.
Is as it relates to have a fee that will remain our bankers.
And and one that relates to the treatment of our deferred taxes in the leading up to the transaction, we were creating deferred taxes.
For the.
Tax consequences of the expenses that we were.
Spending in the merger.
And those two items total I think roughly around $12 million.
So those would be the two largest expenses that.
That we would be looking at in terms of the fourth quarter.
And then some integration cost.
Okay.
And then I think you set equity dilution year to date was roughly 40 cents you know what that was in the third quarter.
I think just for the quarter that number was 21 cents, let me let me confirm that.
Yes, I was 21 cents for the for the for the third quarter.
Okay.
Depending on how the let's say the commission boots.
To approve recovery of the WCS may.
Can we expect to see a press release from SGW reversing the accounting treatment. Shortly thereafter or would you wait till the quarter to do that.
We would probably we feel it well, it's a noncash charge.
We feel it's a large enough number to where we would we would file a press release.
Okay.
So I'll be looking for something probably on the.
Very good Michael Thanks, Mike.
Thanks, guys.
Okay.
Thank you again to ask a question. Please press star one are you touched on telephone.
Your next question comes from alive.
Jonathan Reeder of Wells Fargo. Your question. Please.
Hey, good morning, gentlemen.
Hi, John .
Jim can you remind me.
The revenue increase from Anna they water GRC for the full year that was like 16, and a half million dollars right.
Thats right.
So why was there only a $1.3 million revenue increase and Q3 from the chain cumulative water rate.
It was much higher Q1, and two in Q3, the higher usage period.
Yes, it's a real good question, Jonathan and I don't want to get to technical on the response it I'd be happy to give you some additional information on it.
Off line, but.
The long and short of it is.
In the general rate case, we were able to get as part of our.
Initial.
Rate increase the mid year adjustment for the Santa Clara Valley water cost so the Santa Clara Valley water cost were included in beginning rates.
For the first two quarters.
And then when the actual rate went into effect in the third quarter.
It it the water cost fall impact was was reported there where in the.
The first two quarters the.
The rate increase associated with that water cost.
Had already been put in place and we stand simply put the difference into a balancing account that were reversing out so you're not going to see it in the change in rates, but what you're going to see it is is that impact but have been included in the change in the balancing accounts.
Okay, yes might be useful.
After the call on that.
Yes, I guess the dialogue in short of it is it's just the way that we were allowed the rate increase for the district in the first year of that the general rate case, that's that's the long and short of the answer and I'd be happy to walk you through it.
Yes, Okay, Yeah, I was kind of thing.
Thanks.
Good morning, 7 million that you have recorded during the first half of the year would imply rather.
Turning to have 10 million during the second half of a year pickup there.
But it sounds like that may not be vacated because of that.
Yes, we will in fact.
We are on track to as as I said, if you if you listen to where we are relative to our usage numbers, we are pretty well on track to hitting our authorized revenue number. It's just that geography of where that is represented in the change over the quarter.
Okay, and you said on residential side, what was the usage compared to where we were up about 4% on the on the quarter.
Okay and your year to date.
For 4% up on the residential 5% balance.
Yes, thats about right.
Okay.
And then I think it was in your proxy indicated that 2021, yes.
Yes projected to 43 is that still accurate and then should we expect that mid to high single digit accretion from.
Connecticut water reveal off of that Q4 hundred three standalone basis.
Yes, I think we're pretty pretty.
Comfortable with that.
For 2020.
You mentioned 2020 right that was in 2019, Thats 2020, I think in 2021 that.
21 gallon, yes, yes that net down Thats sounds right for 2021, yes.
Okay. So.
Yes.
That awful lot and then can you help me understand production expenses.
But 1.3 million increase and.
Cost recovery balance.
Balancing and memorandum account.
3.8 year to date.
Offsetting revenue recognition there.
Got it by income neutral or or what are those items government.
Yes so.
Anything absent an increasing customer usage is driven primarily by by two things one one is.
Within rates, we have the increase in costs from the from the water district.
Either through pumping or the pump tax or the the actual purchase of imported water and that's covered by the fit the general rate case as I mentioned earlier.
In addition, we did have some incrementally higher costs relative to the treatment of water coming out of our montevina water treatment plant.
And those costs were really driven by the fact that because we are treating more brackish water, it's costing us more to dispose of the.
Particulates that we take out of the out of the plant. So those are really the things that are driving the higher water cost and you really have to take a look at that relative to that to the.
Fact that we're also getting more water out of that plant.
Okay.
Offsetting.
Yes, Thats all I have.
Yes, Jim if we could follow up on on the first point that would be useful. Thank you.
You bet very good.
Thank you at this time I'd like to turn the call back over to Eric Gomberg for any closing remarks actually I'm sorry, we do have follow question from us through guess Kopra of Evercore ISI. Your line is open.
You guys, sorry, I forgot to dollars in the first thing any.
Just any commentary on.
Forward looking guidance and when might.
We expect another mergers closed.
Im sorry on forward looking items, you're talking about just generally how we.
Steve.
As like your peers some of your peers, but okay gotcha.
Thank you for the long term growth something like that along those lines.
Yes, I appreciate the question and we we have received that a lot we understand that that would that would be of a benefit to our analysts and investors and we are considering that and our board to we've.
Putting the two companies together it is truly transformative and we want to make sure that we're able to give you real good clear sight forward and we're working on that we would expect to be out.
In December and January on some investor meetings, and we will do everything we can to give you give you a strong sense of our of our forward momentum there and how we're doing.
Excellent. Thank you guys.
You bet.
Thank you at this time I'd like to turn the call over to October for any closing remarks, Sir.
Yes. Thank you operator, thank you everyone for joining the call today. We appreciate your interest in SJ group and your support we continue to focus on executing our growth strategy to invest in return and earn a return on our investment in infrastructure to continue our acquisition program going forward and divide.
Services to other utilities.
As part of our core business strategy. So.
We continue to look forward to the future. We're very excited about our new company in the additional diversification that we've achieved to not just in service territory, but and regulatory environments.
And economic environment, and we're very excited about having this this.
Merger concluded and getting forward. So thank you again for year for your interest in our company.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.