Q3 2020 SJW Group Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the S.G.W. Group third quarter earnings Conference call.
At this time all participants are in a listen only mode.
After the speakers speakers presentation, there will be a question and answer session.
To ask a question during the session need to press star one on your telephone keypad.
Please be advised that todays call is being recorded.
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I would now like to hand, the conference over to Jim Lynch Chief Financial Officer. Thank you. Please go ahead Sir.
Thank you operator, welcome to the third quarter or 2020 financial results conference call for S.J.W. group.
I will be presenting today with Eric Thornburg Chairman of the Board President and Chief Executive Officer for.
For those who would like to follow along slides accompanying our remarks are available on our website at www Dot as JW group Dotcom.
Before we begin today's presentation I would like to remind you that this presentation and related materials posted on our website may contain forward looking statements. These statements are based on estimates and assumptions made by the company in light of its experience historical trends current conditions and expected future developments.
As well as other factors that the company believes are appropriate under the circumstances.
Many factors could cause the companys 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.
All forward looking statements are made as of today and that's JW group disclaims any duty to update or revise such statements.
You will have an opportunity to ask questions at the end of our presentation as.
As a reminder, this webcast is being recorded and an archive of the webcast will be available until January 25th 2021.
You can access the press release and the website webcast at our corporate website.
I will now turn the call over to Eric.
Thank you Jim welcome everyone and thank you for joining us American Thornburg and it is my honor to serve as chairman President and CEO Best Kw agree.
It was just over a year ago, that's GW group completed its transformative merger with Connecticut water.
We knew going into the combination that are teams across the country had similar values the commitment to service that our people would work well together for the benefit of customers the co workers shareholders and the environment.
In the months that followed our historic combination I cannot tell you how proud I am of our people and their passion for protecting public health employee safety, serving our customers and communities and living our shared values.
Just four months into our integration, we like others, we're faced with COVID-19.
It was to be the first of many challenges in 2020.
We have included wildfires and brownouts in our California service area.
A significant late winter snowstorm in Maine, the tropical storm in Connecticut, and drought in Texas.
The challenges of 2020, it affords bonds and showing the strengths within and across our operations.
In many ways. This has accelerated our integration, especially the work of our employee health and safety team, which has been outstanding.
Using a pre Cove at 19 pandemic plan has their foundation and with the support of their colleagues they created protocols policy.
P. P E guidelines sort of kept our people safe, while allowing them to do the critical work necessary to deliver life sustaining drinking water to 1.5 million people across all four of our states.
Of course mental health is just as important as physical health.
In view of the times, we have expanded the variety of mental health resources available to employees and their families.
As we all react to stress differently, having an array of options available allows our people to find the resources that are best for them.
Offerings range from an employee peer support team to online mindfulness sessions to professional counseling through our employee assistance program and medical programs.
Our managers have received training on how to have those sensitive conversations conversations with peers.
And co workers that they're concerned about.
Our employees are resilient and we continue to support their mental and physical health and wellness.
That's true W. group remains focused on its core growth strategy of investing in water system. So we can provide safe and reliable water service to customers and communities and earn a fair return for shareholders.
We've been reminded that the critical nature of investments in clean safe drinking water for public health and sanitation like never before.
Despite some delays due to COVID-19, our operations in Connecticut, Maine, and Texas are on track to deliver their 2020 capital programs.
And in California, San Jose water will achieve the $320 million three year capital program authorized in the last rate case.
In July ground was broken on main water Soco River drinking water treatment facility in Bedford, which is part of the bid deferred and soco water company acquired by CTW Aes in 2013.
This generational investment of more than $50 million replaces a facility that has been serving customers in southern Maine since 18 84.
The new facilities being designed to meet sustainable infrastructure standards set by the institute for sustainable infrastructure. This.
This project was slightly delayed in 2020 due to coated but will be completed on time in the spring of 2022.
Continuing our commitment to invest in critical infrastructure. The overall 2021 capital plan trips JW group's subsidiaries has been set at $237.8 million, including the largest capital plans and the history of our new England and.
Texas subsidiaries.
We remain focused on our core business and executing on our growth strategy in a most extraordinary year. This.
This is a true testament to the commitment of our people and the passion of our leaders and value of our mission.
We reaffirm our earlier guidance of $1.95 to $2.05 per share in 2020.
I will now turn the call over to Jim who will review our Q3 financial results. After Jim's remarks, I will address other regulatory and business matters Jim.
Thank you Eric.
Our quarter and year to date operating results reflect an increase in earnings related to the third full quarter of combined operations with Connecticut water service or CTW S.
And an increase in customer usage and authorized rate increases in our California, and Texas water utilities.
These increases were partially offset by higher water cost due to a decrease in the availability of surface water supplies in our northern California service area due to dry weather conditions. This past winter and the increase in customer usage.
Third quarter revenue was $165.9 million or a $51.9 million increase over reported third quarter 2019 revenue of $114 million net.
Net income for the third quarter was $26.1 million or 91 cents per diluted share. This.
This compares with $9.5 million or 33 cents per diluted share for the third quarter of 2019.
Diluted earnings per share for the quarter reflects the result of TC CTW S, which contributed 25 cents per share.
In California, and Texas authorized rate increases contributed 11 cents per share a decrease in administrative and general expenses added nine cents per share an increase in customer usage contributed seven cents per share and other items combined contributed 11 cents per share.
These increases were partially offset by higher water procurement costs due to the decrease in California surface water production of 16 cents per share an increase in production cost of six cents per share due to higher customer usage higher depreciation expense of six cents per share and an increase in interest.
And on new long term debt of five cents per share.
Also recall that in the third quarter of 2019, we recorded a reserve against our 2018 and 2019 water conservation memorandum account or our WCS may balances as we determined we no longer met accounting recognition requirements.
The impact of establishing the reserve on 2019 earnings was 29 cents per share.
In addition in 2019, we earned interest of six cents per share on temporarily invested proceeds from our December 2018 equity offering and incurred CTW us merger expenses of five cents per share.
During the third quarter of 2020, no similar account reserves were established investment income earned for merger expenses incurred.
Revenue was $428.8 million of 46% increase over the same period last year.
Net income for the first nine months of 2020 was $48.2 million or $1.68 per diluted share compared to $28.9 million or one dollar one per diluted share during the same period in 2019.
The change in diluted earnings per share for the year was due to many of the same factors noted for the quarter CTW US results contributed 69 cents per share.
Higher customer usage in California, and Texas contributed 49 cents per share rate increases contributed 26 cents per share and other items added 35 cents per share. These.
These increases were partially offset by higher water procurement costs due to a decrease in California surface water production of 51 cents per share.
Increased interest expense on new long term debt of 40 cents per share in.
Increased production costs due to higher customer usage in California, and Texas of 37 cents per share and increased depreciation expense of 17 cents per share.
In addition in 2019 the impact of the WCS May Reserve was 28 cents per share income earned on temporarily invested 2018 offering proceeds was 17 cents per share and we incurred CTW us merger expenses of 16 cents per share.
In 2019, we also issued customer rate credits related to our customer billing settlement with the CP you see a six cents per share.
None of the 2019 September year to date items recurred in 2020.
Primarily due to a 21.2 million dollar increase in depreciation expense $18.2 million and higher general and administrative expenses and 10.3 million in higher property and other non income taxes. These increases were primarily a result of inclusion of C. T. W. S year to date activities and the.
<unk> for the first nine months of 2019, we encourage $6.1 million in merger expenses related to the C. T. W. S merger that did not reoccur in the first nine months of 2020.
Year to date 2020, other operating and expense included $12.3 million of additional interest expense on S. J W groups $510 million senior notes issued in October of 2019, and $6.3 million of new interest from the addition of C. T. W. S borrowings.
And the first <unk> nine months of 2019 other income and expense also included $6.3 million of interest income earned on the temporary investment of proceeds from the companies December 18th Tech equity offering.
As noted no similar income was earned and 2020.
Turning to our capital expenditure program, we added $56.3 million in company funded utility plant in the third quarter of 2020, bringing total company funded editions for the first nine months of the year to $130.4 million. We are on track to add between approximately 195 million to 200 million and you.
Until the plant in 2020.
This compares to our free COVID-19 target of approximately $220 million.
Our year to date 2020 cashflows from operations decreased approximately 20.7 million over the same period in 2019.
The decrease was primarily due to the authorized collection of $36.9 million and balancing a memorandum accounts in 2019.
A decrease of 13.9 million due to a combination of higher unbilled revenue balances and lower slower collections from customers during the COVID-19 pandemic.
617 million dollar increase in the payment of amounts previously and voiced in a crude and a 5 million dollar upfront payment in connection with our city of Cupertino service concession agreement B.
These decreases were partially offset by a 39.5 million dollar increase in net income adjusted for non-cash items and 2.3 million dollar increase in accrued interest as a result of the newly issue that.
At the end of the quarter, we had $184.2 million available on our bank lines of credit for short term financing of utility plant additions and operating activities.
The average borrowing right on line of credit advances during the first nine months of 2020 was approximately 1.89%.
So with that I will stop and turn the call back over to Eric.
Thank you Jim just as leaders of employees with X J W. Group have adapted to work in an environment to require social distancing. So too has our economic regulators.
The plan merger of the Avon Water company and Heritage village Water company with Connecticut water was completed and cute three.
Connecticut public utilities regulatory authority approved our application and agreed that a combination of art, Connecticut operations into a single subsidiary will provide efficiencies that benefit customers.
The California Commission dismissed the order instituting investigation into the merger with <unk>, Connecticut water service and has close the proceedings.
AH, California Commission approved a request to establish a P fast memorandum account, allowing San Jose water to track for potential future recovery expenses already incurred as well as future course related to Pee fast sampling and monitoring and customer communication for.
Those investors, who are new to California utility regulation, a memo account is an accounting device that after approval by the commission maybe used to record various expenses. It incurs. The utility may later seek authorization from the commission to recover the recorded amounts and rates <unk>.
Stablish men have a memo account does not guarantee that the utility will recoup the track on now.
As previously reported the California Commission's ruling to discontinue the water revenue adjustment mechanism and modified cost balancing account in favor of a Monterey style W. Ram and incremental costs balancing account came as a surprise to the industry well disappointing the room.
Willing does require and more comprehensive sales forecast analysis and places greater importance in arriving at realistic consumption numbers.
San Jose water does not operate under a water revenue adjustment mechanism and modified cost balancing account and the ruling should actually benefit us as we look to further align both actual fixed cost great recovery and customer usage with <unk> authorized to bounce and our upcoming.
G R C filing.
And California, Connecticut, and Maine, we are preparing right case filings San Jose water is required to file every three years and that's filing will happen in January 2021.
Connecticut water has not been in for a general rate case and more than a decade and zac. Thanks to the adoption of repair tax accounting the company provided customers with a two year right credit through a 2014 right settlement agreement.
In 2018, the company was authorized to recover the cost of the 36 million dollar Rockville drinking water treatment facility without the need to file a full rate case.
The Connecticut case will be driven largely by the significant infrastructure investments that have occurred since 2010 that we're not recovered through wicca filings or the Rockville settlement.
We expect new rates in Connecticut to be in place by mid Q3 2021.
Connecticut has a statutory timeline 200 days once of cases filed which provide some certainty regarding the timing of the decision.
Connecticut also recently filed for an increase of 1.1% and the water infrastructure and conservation adjustment tore Wicca surcharge.
If approved by PURA, the increase would increase revenues by a million dollars and would be effective in January of 2021.
In Maine, where rates are set on a division by division basis for the 10 operating divisions, we anticipate filing general rate increase applications and two divisions and water infrastructure surcharge or whisk increases in six divisions by year end 2020.
In October S. J W. A T X R. Texas utility filed the first acquisition application in Texas to request treatment under the new fair market value legislation the.
The commission has developed a process to determine the fair market value of an acquired utilities rate base, which would be used for future rate making purposes.
If approved by the Texas Commission.
This bolt on acquisition would add over 200 customer connections and bring additional water supply to serve this growing area.
S. J W. A T X as connections are nearing 19000, and its growth is impressive nearly tripling and number since the acquisition in 2006, and reflecting 8% customer grows in the last 12 months.
With a diverse portfolio of water supplies, a growing wastewater business and continued additions to customer base through organic growth and acquisitions, we remain optimistic about the prospects for rescue W. A T X.
Delivering exceptional customer service is critical to our success and our customer service working group is sharing experiences and best practices across all of our states.
This isn't an employee driven team that operates with the support and engagement of senior leaders.
Team is empowered to dive deep into our customer satisfaction ratings identify opportunities to better serve customers and to collaborate on solutions.
We have seen an uptick in account aging and cute three most likely due to the moratorium I've shut off that had been mandated in California, Connecticut in Maine.
Texas had rescinded it's more torreon in June.
Mm auditoriums in Connecticut and name have now ended as well.
California's will remain in place at least until April of 2021.
We continue to communicate with customers, especially those that have an overdue balance on your accounts and are eager to help them through deferred payment plans and other available programs that vary by state.
Turning to our environmental social and governance initiative, there is much to be proud of.
Our newly formed diversity equity and inclusion council is comprised of employee volunteers, who are committed to building an environment where employees can be there two cells and feel included welcomed and valued at work.
And where the company can be a force for good in the community.
But first steps of our journey together started with listening to personal stories of our own people as they share their life experiences with racism and then a quality.
The stores were powerful and the commitment from our team is strong.
S. J W Group has been recognized by 2020 women on boards as a winning company because more than 20 per cent of our directors are women.
I actually for Us J W. A group, it's close to 50%.
I just wanted to factors that contributes to a best in class corporate governance score from I S. S.
We are proud of our governance score it reflects our steadfast commitment to transparency regulatory compliance and ethical conduct.
2020 continues to be an unpredictable year.
Our teams have faced the challenges and continue the vital work I'm delivering life sustaining water.
That is essential for the health and safety of families and communities we.
We have protected our people so that they can serve their customers.
We are guided by these fundamental principles protect our people protect public health and exemplify our core values integrity respect service compassion trust transparency and teamwork.
It has served as well and we will continue to rely on that approach as we move forward.
With that I would like to turn the call back to the operator for questions.
As a reminder, 92 gentlemen to ask the question at this time, Please press star and the number one of your Touchtone telephone if you'd like to remove yourself from the queue. Please press the pankey.
Please Sam I'll I'll be compounded Q&A roster.
[noise]. Our first question comes from the line of Angie stores and ski with C point Lobos Your line is nothing.
Hello. Thank you very much for taking my question. So my my first question is about 21 diet and if you will be providing it nasty because.
Uhm, you know given the upcoming Connecticut May case, and it says Ocean on me and that's a quarter of 21.
Again I'm just wondering if that's going to prevent you from from issuing 21 guidance in Saint temporary.
Thank you Angie appreciate your question Yeah, we are taken careful consideration of our guidance for 2021, just for the fact that you mention we will have a rate case and it will.
We don't want to you know try to predict or telegraph, what we're expecting a that decision. So we'll be working on that and give you a little bit more clarity on that as the as we approach the first quarter of next year, but we're working through that we understand that investors have appreciated. The fact that we did.
Provide guidance for the first time in our history. This year and we'd certainly like to continue to provide that guidance. So so we'll be working through that and we'll let you know as the year unfolds.
Okay, and and and even besides this this Connecticut may case.
You know given the lessons learned from this year and admittedly it is an unpredictable year. Some some for many many reasons I mean should they expect that you would bacon some conservatism regarding you know purchase that lack cost.
And for for San Jose water.
Again, I'm I'm basically clarity trying to have this guidance is going to come out and and it just seems to be so many moving pieces that again, given the experience of the C. A I would expect you to be relatively conservative at this up the initial take that's <unk> yeah yeah.
And you know I I really appreciate your point you know you know you look back in 2019, we had 5 billion gallons of surface water.
And as the year cause we approached 2020, we thought you know we were being relatively conservative at 3.5 and it says you know no. We're probably just a little over a billion. So that was a significant.
I just meant what we will do is be very transparent about the amount of of surface water that is in any projection or forecast that we provide so that there's real clarity of that the other part I'd mention is I think the.
Take the the.
Is spread there is going to be reduced as we go forward because as I said, we we had 5 billion in 2019 that was very unusual.
Uhm and you had an rates we have about 2.6 billion and our current rate design. So I would not anticipate us building into any forecast in the future.
No the amount that would exceed what is built into into base right. So that would reduce the spread as if you will so that we can provide better clarity and comfort to investors.
Great and and my last question.
I appreciate that you guys don't have a full van so the the <unk>. The C. P. C decision on it doesn't really apply to you, but what is [laughter] they'll set you know they get there you are potentially vico challenges from other California utilities, you know successful and the commission <unk> <unk>.
You know that this conduct a thorough study of the out of that the coupling mechanism you think that that would potentially an open a door for you guys to ask [laughter] Oh asked again full at full them and would you be interested in that.
Well first <unk> as we filed this case, we're we're definitely going to continue to work on is is making sure. We in our rate design recover more of our fixed costs and the basic service charge and then as well to make sure that we are lying.
You know what's in rates with the amount of water customers actually purchased or Amir if we get those two numbers really right you know it mitigates and minimize his bed any risk of.
Or or or mitigate some great deal of the risk of that difference there and we were successful in the last case and and and in addition, if there is a change in policy at the commission, we'd carefully review that and and would consider taking advantage of asking again for.
Iran, and and the and the balance on your account just cause it can work for the benefit of customers and for shareholders.
But you know, we don't anticipate that and so we're building our current filing in a manner that we think really balance is the interest there and protects both customers and shareholders.
Great. Thank you.
Thank you and I appreciate your interest in this.
Thank you and our next question comes from the line of Jonathan Reader doesn't last Fargo. Your line is open.
Hi, Good morning, I'm just want built on first question a little bit so how should we be thinking about you know the surface water availability in California, as we head into you know 2021 I know it's.
You know early in the rainy season, and all that but you know at least the state kind of starting from a deficit what are in the forecast looking like you know just stuff along those lines.
Yeah sure Jonathan look it's while the rainy season has begun there's been no sign range anywhere and so there's really no difference no update that I can provide from from a weather standpoint, we would typically expect to see the majority of rainfall you know in the January February early March <unk>.
I'm frame you know so so I would be very conservative with the number at this point because you know there is no change in the current condition we do.
Expect to you know to to have at least a billion gallons probably.
You know a billion and a quarter and so that's what we've got this year and will continue to update it investors be very transparent about the number and make sure that we're clear and any guidance. We provide what the assumption is for surface water, but but yeah definitely I think caution and.
And conservatism is the rule.
Okay. How close is you know.
<unk> Street, maybe heading into another drought or then you know some of those worries would go away from the loss you know revenue adjustment mechanism checking Nana.
That's something that you know, it's kind of on the radar right now or you know what to take another year like you know this past year before.
That situation do you think.
[noise], Jonathan I I would say, we're not really anywhere close to to a significant drought across our operations other than our surface water supply you know when you look at the ground water table, it's it's really in great shape or the valley water.
District car wholesaler, you know has they're sending tropic groundwater back at capacity. So you know really a strong strong position there at this point. It is just really this one small segment of our supply that you know, we just didn't get the range.
Santa Cruz Mountains West here I guess I'd also again remind you that we're comparing year over year. So we're comparing a 5 billion gallon year to a 1 billion gallon year year over year and and that produces some big some big differences. So next year you know the the year over your compare.
And it should be much different.
[noise], Yeah, Jonathan I'd I'd, just add one other thing is that the the real wait the the way that the that the surface supply works in the Santa Cruz Mountains is you know in the early portion of the the rain rainy season, you you kind of saturate the soil and then you get start getting benefited the runoff.
F as the the season matures.
This year the timing of the the the period when we did not get the rain was really <unk> right around the the the month of February.
And what that allowed as it laugh at allowed the the the the the train up there to dry back up if you will in which case and when we did get the rain and the the March and April time frame. It. It we didn't get the run off that we otherwise would have gotten I had it been a normal rainier. So there were a lot of.
Geographic centric issues related to the lack of rain with regards to our surface water this year that weren't experienced throughout the state.
It sounds like something that's pretty difficult to monitor from far away [laughter].
I appreciate that color last question for me and Jim I'm guessing you might've anticipates, along these lines and recent presentation you guys had a 5% longterm EPS growth rate target that you indicate is that still the target and you know kind of if so how should we be thinking about you know.
<unk> with the bases for that target.
Yeah, clearly you know we were leveraging that guidance Jonathan off of Conservative view of our Capex spanned in rate base grows over over that five year period that was presented in that presentation and as far as.
The the beginning base with which we start that we certainly have to consider Ah Ah Ah slight downtick in the surface water as Eric described and we'll consider all of that as we come out with our guidance for 2021, if in fact, the the direction.
I'd like to do is to provide that guidance, but in any event. We will continue to provide the transparency. We need two is Eric mentioned on the surface water and provide some quantification of the impact of that on a quarterly calls.
Okay, how about actually specifying what that bases should we be thinking around like maybe the 2021, you know base with whenever that surface water.
And is it you know.
Thought is at least five per cent growth off of that 2021 base.
Yeah again, we we have to kind of huddle up on that to to determine what we're comfortable with in terms of including in in in <unk> quite frankly, some of that is going to be predicated on what happens in the first or the last two months of of this year.
Right, because that's really the beginning of the rainy season up and the the the Santa Cruz Mountains. That's when we started to get the saturation.
Of the ground up there.
Okay.
Okay, Alright, well I guess I'll wait for February and hopefully you guys are able to provide a little guidance I think it would be helpful. You know as as investors looked at trying to kind of re frame what might be kinda normalized earnings for you guys. So I. Appreciate your time this morning and talk to them.
Perfect. Thanks, Jonathan.
Thank you so much as a reminder, ladies and gentlemen, you have a question at this time.
<unk> and the number one.
I'm not showing any further questions on now turn the call back over to Eric Thornburg C E O for closing remarks.
Thank you for your participation in our call today yesterday that'd be group as a company with 154 year track record of serving customers communities and shareholders. This quarter marks the 309th consecutive dividend payment by our company over 77 years and 53 consecutive years the.
<unk> W. A group stockholders have received an increase in their calendar year dividend. It's my sincere hope that you and your families remain safe and healthy during this great challenge of 2020 again I wish to express my profound gratitude to the employees Oh, that's J W. Group again, thank you for your participation in the call today.
Ladies and gentlemen does does conclude the program you may now disconnect <unk> have a great day.
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