Q2 2020 SJW Group Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the S.J. W. Groups second quarter 2020 financial results Conference call. At this time, all participants are any listen only mode. After the speakers presentation. There will be a question and answer session to ask.
The question during the session you would need to press star one on your telephone if you're acquiring any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Jim Lynch Chief Financial Officer. Thank you. Please go ahead.
Thank you operator welcome to the second quarter 2020 financial results conference call for STW group.
We'll be presenting today with Eric Thornburg care motherboard, President and Chief Executive Officer.
For those who would like to follow along slides accompanying our remarks are available on our website at www Dot that's JW group Dot com.
Before we begin todays 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 of 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 financial results press release and to our most recent forms 10-K, 10-Q, and 8-K filed with the Securities and Exchange Commission copies of which may be obtained on our website at.
All forward looking statements are made as of today and STW group disclaims any duty to update or revise such statements.
You will have an opportunity to ask questions at the end of the presentation.
As a reminder, this webcast is being recorded and an archive the webcast will be available until October 26 2020.
You can access the press release and the webcast at our corporate web site I.
I will now turn the call over to Eric.
Thank you Jim welcome everyone and thank you for joining us I Amerisourcebergen is my honor to serve as chairman President and CEO of STW agree.
The importance of delivering clean safe and reliable drinking water has never been more evident that now when something is basic handwashing has become such a critical activity in protecting public health and preventing the further spread could bring team.
As I was preparing my remarks, this week or new England's operations, especially Connecticut was hit with tropical storm Hexa, yes, despite widespread power outages across our service towns. We continue to provide uninterrupted water service to all of our customers, which remains essential during the period.
Nick.
This is a testament to our highly effective planning and capital investment strategy and are dedicated teams who served our customers well throughout the event.
We also think the commissioners have the Connecticut public utilities regulatory authority and leadership of the Connecticut Department of public health for their support and assistance to prioritize power restoration to our central facilities during the event.
Our 700, plus employees nationwide delivery mission critical service to the customers and communities that we're privileged to serve.
That is not change because of the pandemic, there's no replacement for clean safe tap water what has changed how we do our work.
In the early days as a pandemic, we temporarily pause all non essential field work to assess the risk associated with meter reading construction and other field operations.
Our mission was simple.
Protect our people so that they could continue to deliver on our public service commission of delivering like sustaining water service protect our customers from the further spread of Coke is 19 and protect the company. So that we could continue to deliver on our critical public Health Commission.
The vast majority of our office employees continue to work remotely and we anticipate this to continue through at least the third quarter.
Our critical field employees returned to work after a thorough review of each task was conducted by our environmental health and safety and operations teams.
Extra safety precautions and the use of appropriate pp were implemented.
And we continue to follow the guidance, a federal and state officials and public health agencies.
The leadership team is incredibly proud of our people and the way they've responded to the unique challenges. During this pandemic finding new ways to work effectively and safely while serving our customers in communities.
We've seen tremendous innovation as our teams effectively and efficiently work remotely.
We have launched an internal initiatives to capture those ideas of processes and we will build on them as we move forward.
As an example, our successful work from home program, which launched when we wanted to get our people out of the office because of could 19.
Has enabled us to sign on to the cut to commute pledge spearheaded by Santa Clara County in California.
For our California employees, whose work can be conducted remotely we've targeted a goal of working online how do the office for 25% of the workweek were about five days a month when normal operations reserves.
This pledge bring several benefits, including greater work life balance for our employees continued delivery of exceptional service to our customers and enhanced protection for the environment.
There have also been some surprising benefits could 19 has given STW group and its subsidiaries an opportunity to work shoulder to shoulder virtually of course with a common purpose protecting our employees and public health during the pandemic.
Our teams in California, Texas, Connecticut in Maine seized that opportunity and forged a bond to serve customers communities and each other now and into the future.
This is highlighted the strengths of our new team and shown how the skills in their respective states complement each other for the benefit of the combined organization.
It has accelerated our integration work and built a web teamwork knowledge and resource sharing all across our operations.
We've also launched our first nationwide customer satisfaction survey that will allow us to benchmark each of our operations and provide a platform to share successes that will further enhance customer satisfaction across our organization.
Regulators in all four of our states, where we operate have initiated proceedings were adopted mechanisms that allow us to track and record cope at 19 related expenses and lost revenue for consideration at a future date.
Through the second quarter, we have seen no measurable impact on total revenues due to the pandemic.
How collections, while slowing continue to be strong and we're closely monitoring this now that the federal pandemic unemployment compensation benefit has expired.
On the expense side, we're seeing some areas of savings so just travel as well as areas of incremental costs.
We also remain focused on closely tracking our operating results and working with our peers and local and national industry associations to raise attention to the industry impacts of the pandemic and advocate for further regulatory relief.
As we are now part of the larger combined organization, we have the added benefit of weather economic and regulatory diversity that comes from operating in four states to help mitigate some of the risks.
Our response throughout this event has been and will be guided by this fundamental principle.
Protect our people protect public health and exemplify our core values integrity respect service compassion trust transparency and teamwork.
Has served us well and we will continue to rely on that approach as we move forward.
As such we reaffirm our earlier guidance of $1.95 cents to $2.05 per share in 2020.
I'll now turn the call over to Jim will review, our Q2 financial results and after Jim's remarks, I will address other regulatory and business matters Jim.
Thank you Eric.
Our quarterly operating results reflect the second full quarter of combined operations with Connecticut water service anchor Cws and increasing customer usage and authorized rate increases in each of our water divisions.
These increases were partially offset by a decrease in the availability of surface water supplies due to dry weather conditions in our northern California service area. This past winter.
During our first quarter earnings call. We noted that the CTW us transaction will change the pattern of our future quarterly earnings recall that interest on debt and the impact of new shares issued to finance the transaction is being recorded evenly throughout the year.
On the other hand, CTW us earnings follow a seasonal pattern that is typical for water utilities.
While this mismatch will have no impact on annual results, we anticipate it will lead to changes in the pattern of our future quarterly earnings compared to what we experienced prior to the CTW us merger.
Second quarter revenue was $147.2 million, a 44.2 million dollar increase over reported second quarter 2019 revenue of $103 million.
Net income for the second quarter was $19.7 million or 69 cents per diluted share.
This compares with $13.5 million for 47 cents per diluted share for the second quarter of 2019.
Diluted earnings per share for the quarter reflects the results of CTW us, which contributed 27 cents per share.
Increased usage, which contributed 24 cents per share and rate increases, which contributed five cents per share.
These increases were partially offset by a decrease in California surface water production of 19 cents per share.
Interest expense on new long term debt of 12 cents per share and increase production cost of eight cents per share due to higher customer usage.
In addition, and the first half of 2019, we earned interest of six cents per share Uninvested proceeds from our December 2018 equity offering.
Paid customer rate credits of six cents per share related to our 2019 billings settlement with the California Public Utilities Commission or the CP you see.
And incurred CTW us merger expenses of six cents per share.
None of this re occurred in the first half of 2020.
Turning to our comparative analysis for the quarter, our 44.2 million dollar increase in revenue was primarily due to the merger with CTW us which contributed $32.8 million.
Increased customer usage, which contributed $8.4 million and we generated $1.6 million in cumulative rate increases.
The revenue increase was partially offset by 1.3 million dollar net decrease in California, balancing and memorandum accounts.
In addition, we issued $2.2 million and customer credits in the second quarter of 2019 that did not recur in the second quarter of 2020.
Water production expenses increased $16.1 million compared to the second quarter of 2019.
The increase included $6.9 million related to CTW us sales.
$6.7 million for the purchase of additional water supply necessary to supplement the low volume of northern California surface water and 2.9 million due to higher customer usage.
These increases were partially offset by 1.9 billion dollar decrease in California cost recovery balancing and memorandum accounts.
As stated on our first quarter earnings call in 2020, we anticipated greater availability of surface water from our northern California watershed.
Through the first two quarters of 2020, we experienced the second lowest rainfall total in a watershed since 2011.
Absent additional rainfall, we anticipate 2020 surface water production will be approximately 2.3 billion gallons lower than planned.
Incremental costs to supplement the shortfall is approximately $4.2 million per billion gallons.
Other operating expenses increased $14.1 million during the second quarter, primarily due to higher depreciation expense of $7.7 million.
$4.5 million, and new general and administrative expenses and $3.3 million in higher property and other non income taxes.
These increases were primarily a result of the inclusion of CTW us as second quarter activities.
In addition, we experienced a $1.8 million decrease in merger related expenses.
The effective income tax rate for the second quarter was 18% compared to 23% for the second quarter of 2019.
The effective tax rate decrease was primarily due to the flow through impact of certain CTW as tax deductions.
Turning to the first six months of Twentytwenty revenue was $263 million for 46% increase over the same period last year.
Net income for the first six months of Twentytwenty was $22.1 million or 77 cents per diluted share compared to $19.4 million or 68 cents per diluted share during the same prior year period.
The change in diluted earnings per share for the year was due to many of the same factors noted for the quarter.
Higher customer usage in California, and Texas contributed 42 cents per share.
T. W. US results contributed 35 cents per share.
Rate increases contributed 15 cents per share and savings in merger related expenses contributed 12 cents per share.
These increases were partially offset by a decrease in California surface water production of 35 cents per share.
Increased production cost due to higher customer usage in California, and Texas of 33 cents per share.
And interest expense on new long term debt up 26 cents per share.
In addition in 2019, we earned 11 cents per share of interest income on invested proceeds from our December 2018 equity offering.
These proceeds were used at the end of 2019 to partially financed the CTW as transaction outside no. Similar interest income was earned in 2020.
Our 2021st half increase in revenue was primarily due to the merger with CTW us which contributed $60.2 million.
$14.4 million increased customer usage, and 5.1 million and cumulative rate increases.
Water production expenses increased $33.1 million in the first half with Twentytwenty.
The increase was primarily due to $13.1 million in CTW us expenses.
12.1 million from the northern California surface water decrease and 8.2 million and higher customer usage.
These increases were partially offset by a $3.4 million decrease in California cost recovery balancing and memorandum accounts.
Other operating expenses increased $32.1 million in the first half of Twentytwenty, primarily due to a 13.9 million dollar increase in depreciation expense.
$13.7 million in higher general and administrative expenses and 6.6 million in higher property and other non income taxes.
These increases were primarily a result of the inclusion of CTW as year to date activities.
In addition, we experienced a $4.4 million decrease in merger expenses related to the Cws transaction.
First half 2020, other income and expense included $8.2 million of new interest expense on STW groups $510 million senior notes issued in October of 2019.
In the first half of 2019 other income and expense included $4.2 million of interest income earned on the proceeds of the company's 2018 equity offering as noted above no. Similar income was earned in 2020.
Turning to our capital expenditure program, we added $35.8 million and company funded utility plant in the second quarter of 2020, bringing total company funded additions for the first half of the year to $74.1 million.
We are on track to add approximately 200 million to utility plant in 2020.
Our first half 2020 cash flows from operations decreased approximately $17.4 million over the same period of 2019.
The decrease was primarily due to the authorized collection of $20.1 million in balancing and memorandum accounts in 2019.
A decrease of $11.8 million due to higher unbilled revenue balances and slower collections from customers during the cobot 19 pandemic.
$5 million upfront payment in connection with our city of Cupertino service concession agreement and 4.4 million dollar any $4.4 million increase in the payment of amounts previously invoiced and accrued.
These decreases were partially offset by an 18.1 million dollar increase in net income adjusted for noncash items and 5.8 million in the net collection of income tax receivables.
At the ended the quarter, we had $163.3 million available on our bank lines of credit for short term financing of utility plant additions and operating activities.
Average borrowing rate on line of credit advances during the first six months of Twentytwenty was approximately 2%.
With that I will stop and turn the call back over to Eric.
Thank you Jim.
Well well there are clearly challenges, resulting from the pandemic that are affecting businesses across the nation. That's GW group continues to execute on our core growth strategy of investing in high quality water systems to provide safe and reliable water service to customers and communities and earning a fair return on those investments perks.
Capital programs continue to be the Companys earnings engine, adding rate base and ensuring resilient water systems.
While there was a temporary pause on some capital work in her operations work has resumed and projects are well underway in all four states.
Specifically in California, we do not anticipate any negative impact and continue to work towards achieving the $320 million three year capital program authorized in San Jose water is current general rate case.
We were actually well ahead of schedule before the shelter in place order was issued in Santa Clara County, and we fully expect to deliver the CA PSC approved capital investment level.
In Maine work is underway on our new $50 million Soco River water treatment facility.
It will replace the current treatment facility, which has more than 130 years old.
To the flood plain as the ruble.
In fact, just last week, we held a virtual groundbreaking which you can view on main waters Facebook page.
We also received a final decision for our general rate filing for means Skowhegan division authorizing a $198000 and revenue out of the 200000 request.
The case was filed pre cobot 19, well was completed during the pandemic without delay demonstrating our constructive relationship with the main public Utilities Commission.
The Commission's decision called for a phase in of the increase over two years with the company allowed to recover the associated carrying costs for additional rate filing score. Other divisions are scheduled to be filed in Maine before March 1st of 2021.
In Connecticut, we expect the public utility regulatory authority authority to rule in September on our request emerge our Avon water company and heritage village water company companies into Connecticut Water company. The end result will be a single water utility operation in the state, which will increase efficiency.
By eliminating duplicate costs for regulatory filings payroll processing audits and other expenses associated with having three separate companies.
That's true W.P., XR, Texas water and wastewater utility continues to grow both in customer connections and rate base.
Year to date, we've completed over 10 million of company funded capital expenditures and except as more than $5 million a developer funded extensions a new record for the company.
That's true Wtxf connections are nearing 19000, and its growth continues to impress nearly tripling in numbers since the acquisition in 2006, and reflecting 8% customer growth in the last 12 months.
Turning to water supply all of our subsidiaries have adequate supplies to meet current customer demand.
In general we are seeing higher usage from our residential customers and lower usage, among our business customers owing to the pandemic.
We're seeing some increases in operating costs to meet the increased demands across all four states importantly, our actual sales are tracking nicely versus authorized sales in California.
Despite the lower availability of our own surface water, we continue to be able to meet demand through our wholesalers imported and groundwater supplies.
As Jim mentioned, we anticipate higher water supply operating costs for our California service area in 2020, and as a result lowered our 2020 guidance accordingly in Q1.
On a positive note we do not currently expect any further impact beyond the 30 cents reduction to the 2020 earnings per share due to reduce surface water supply availability.
That's JW group subsidiaries also continue to execute on our integration plans to deliver the benefits of our transformative combination.
All of our customers communities employees, the environment and our shareholders.
Our internal integration management team has been hard at work to leverage the merger benefits for all of our stakeholders and subsidiaries to drive the scoreboard has a combined company.
2020 continues to be an unpredictable year with unprecedented challenges.
Right. The challenges, we continue to invest in our systems and in the health and safety or people customers and communities.
Our team of employees, who clearly demonstrated their passion to serve customers and deliver like sustaining water service, we honor those on the frontline that our company within our industry and across the globe for their work to deliver this essential service.
Lastly on and on behalf of the board I'd like to extend a warm welcome to our newest board member Karl Guardino Karl has been CEO of the Silicon Valley leadership group since 1997, and there's a transformational leader in Silicon Valley. His accomplishments are well known and to longer list Karl share.
Is that same deep affection for the communities, where we all live work and serve with that I'd like to turn the call back to the operator for questions.
Thank you at this time, if you like to ask a question via the phone. Please press star one on your telephone keypad, we'll pause for just a moment to capacity today roster.
Your first question comes from the line of Richard Sunderland with JP Morgan.
Good morning, Thanks for taking my question.
Sure good morning rich.
Starting with the Sushi Ws integration I assume.
You made reference to an accelerated process.
Out of token 19, or some impact there can you speak a little bit more tonight impact and maybe how the opportunities have changed from where they were a year ago.
Sure thing Richard Thanks, It's been a nine month since our close I would emphasize the cultural aspect of the integration is really ahead of schedule.
I think most would agree that the cultural integration side of a combination is just super critical to the long term success of the combination such as this and the fact that we've had this common cause to work together on I think that's what's really driven forward.
The cultural integration and alignment across the organization in terms of the structural integration.
Can be more challenging without the ability of travel and whatnot, but but but we are delivering our synergies and mitigating increases across a variety of cost streams, including the public company costs and cyber and IP is water treatment chemicals and in many other areas you would expect so so we feel like we're really right on track.
On that front.
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Got it thank you for the color there and then.
I believe your GRC filing in California was to last month. So just wanted to check in their of I'm kind of what you see.
The.
Major requests in the.
Upcoming rate case.
Particularly if you alluded to on one quarter.
So looking to address the water supply issues that are impacting your results this year.
Sure thing Richard I'll make a initial comment and it Jim as anything he can add Debbie that'd be great as well.
Richard actually our next general rate case filing is the final filing is due on January the fourth of 2021, and then our next cost of capital proceeding isn't until March 2021, and so we have not yet finalized our application that is in process. So really don't.
Have too much that I can comment on yet.
But you did put your finger on an issue obviously have a great concern as a little aspect of the.
Sort of the cross balancing approach towards ours, our water supply mix.
There's also a.
Proposed decision out on another matter that.
Kind of to our surprising I think the industry surprise included.
Discussion and a resolution on the W.R.A. down that we currently don't enjoy so we're watching that PD were active.
In providing some commentary to it and we think that ultimate decision will color our approach and our upcoming case. So so I'd just ask you to stay tuned on that and I suspect next quarter, we can provide some more color.
Thank you for the uptake.
Thank you for question.
Your next question comes from the line of Jonathan for you here with Wells Fargo.
Hey, good morning therapy, Jim Hi, Jonathan good.
Good.
The three cents a code expenses you singled out are those that you're tracking them and you know those memo account for future recovery, but until you actually get it just can't be offsetting revenues about.
Right.
Yeah, John Jonathan This is Jim that's right.
In at least three of our operating utilities, we have gotten authorization to to capture those cost and trackers.
At this point and in the fourth we've gotten an indication that.
We should be tracking them. So that we have an opportunity to have a discussion with the commission at a later pointed at times, but.
But at this point, we are recording the expenses and not recording any associated recovery of those expenses.
Okay, great any updates on the am I deployment request in California, I think it was in Q4.
Decision anticipated there, but didn't know where on the docket, we weren't interveners position stuff like that.
Jim I'll start and if you have something to add please do but.
You know Jonathan that proceeding we feel very well.
We're continuing to work on it we are hoping and would expect a fourth quarter results.
We're really pleased with our business case, we think its exceptional and.
With state water budgets looming in 2025, you know I think there's a clear call for this type of technology and.
The preceding was very fact based and we.
We really sense that we turned a corner this time than that it was much.
Much better received and there was interest in engaging in food so dialogue around it so were so.
Feeling pretty optimistic about it but still ways to go and.
We're going to be looking towards her decision in the fourth quarter agenda did I Miss anything.
No I think that that's right Eric.
In addition to to what you discussed we do have ongoing conversations with the advocate in California regarding the program and those have been cuts constructive.
So in terms of those conversations is that potentially some they could lead to settlement or has.
Prospects on the settlement kind of past or was there ever the option for settlement.
Jonathan you know there's there are definitely still remains opportunity for settlement at least with okay and of course, there are other parties that would be involved including the staff at the PC and in W. rates of an advocate local advocacy groups. So.
So we know we remain very open to settlement as that can be done and if not we do think that we've laid out a very strong business case and the importance of this further step here. So so again I remain optimistic that at this time will be different.
Okay, Great and then.
I think a plan and Connecticut was the file you some rate case and around mid year has happened filed or kind of what's the update and plan on there.
Yes sure we.
We will be providing further color on that in the third quarter, Jonathan we have not filed yet in Connecticut. We would anticipate filing you know probably in the next six to 12 months and we're looking forward to getting that accomplished as you know we had to stay out that expired on.
July the first of this past year. So so so from this point forward. We're in a position that we could file but of course, we want to make sure. The timing is just right and in our capital program is in the good state to the.
And we'll be providing an update in the next quarter.
Okay.
Bouncing back to California, see some reports about customers receiving an abnormally high bills recently any thoughts what might be going on there I know you've had some billing issues and disputes in recent years.
Yeah sure I can definitely talk about that and turn it over to Jim as well I mean, basically Jonathan what occurred was because of the pandemic.
We put a pause on meter reading. So we estimated built for a couple of months until we were sure that our employees could be safe out there reading meters and as you probably know the methodology for we're estimating bills as you used the same period a year ago as the basis and so you know 2019, what kind of the.
Cool wet year, so now that we've been out.
Catching up and actually getting actual meter readings.
It's really catching up usage is actually occurred we're absolutely sure Theres no no billing errors or issues. It's just a catch up and our team of customer service reps are really working hard to manage that and and help our customers.
And you know were.
I've been very clear that we're not.
Exercising any terminations or or collection activities, we were willing to work with our customers and entertainment agreements and the like and so I think.
It's just a byproduct of the pandemic and we're confident that though it will be results here fairly shortly.
Yeah, Eric I think that cap is it really well.
Okay, Yes, I mean.
Like put some additional pressure maybe on like the bad debt expense that you're tracking and stuff like that or I guess that stuff hasn't flowed through the accounts receivable enough to really do that yet.
Yes, so so I'll start Eric and maybe you can.
Play a follow up on on some additional information on it so in California, Jonathan we read the meters or we estimate the meter reads as the case was during the pandemic on a once every two month basis.
And in Connecticut, We actually Bill quarterly and so you know in our view the pandemic kind of really took effect and hold on our folks with the stay at home orders that were issued in late March across the various states that we operate in and so we're just starting to see.
The impact of the.
Of the of the pandemic and the.
The follow on impact on the economy and People's ability to pay.
And also increased usage as as it's starting to matriculate through the different.
Meter reading cycles across our different state so a little too early to see if there has been been any kind of a significant trend towards activities that are going to lead to higher bad debt. We are seen as Eric mentioned on the call.
And an increase in our past due 90 days and so we're keeping an eye on that as well as activities at the federal level to either re upped the unemployment insurance program or or if not what additional.
Steps they may be taken in order to facilitate.
Folks to pay there they are essential bills.
Yes, they all the thing I would to supplement to Jim's comments is.
Personally I've just been very very pleased.
But what we've seen in terms of collection. So many customers have really honored they're part of this and you know our collection activity has been our cash flow activity has been great.
We arrange payment agreements for some customers and I think the longest that was reported in our workshop last week was was 12 months, but most are two months and so you know anybody having a payment.
Challenge, we invite them to call and work out.
The arrangements with us, but as I said, we've been very very.
Pleasantly surprised by collections.
Cash flow, it's been very good.
Right I appreciate the question on the additional color and congrats on.
Clean quarter most fun.
Yeah, Thanks, Jonathan they say that John.
I want to ask a question. Please press star one.
And there are no further questions at this time I'll pass the call back to Eric.
Thank you operator, and thanks, everyone for your participation in our call today, Yes. Your w. groups. The company with a 154 year track record of serving customers communities and shareholders and you know this quarter March the 320 consecutive dividend payment buyer company spanning 77 years.
And our 50 threerd consecutive year, increasing that dividends to stockholders and we just have our sincere hope that you and your family's remain safe and healthy. During this great challenge of 2020, and again I want to express my preferred gratitude to the employees of the EPS JW group. Thank you very much.
Thank you for your participation. This concludes today's conference you may now disconnect.
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