Q2 2021 SJW Group Earnings Call
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Good day, and thank you for standing by and welcome to the SJW Group Q2.2021.
This conference call at this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone please be.
I have asked at today's.
This is being recorded if you require any further assistance please press star zero.
And the conference over to your Speaker today, Mr. James and its please go ahead.
Thank you operator welcome to the second quarter of 2021 financial results Conference call for SJW group.
I will be presenting today with Eric Thornburg.
Current chairman of the Board, 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 SJW group Dot com.
Before we begin today's presentation and I would like to remind you that this presentation and related.
<unk> 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.
And material cause the company's actual results and performance to differ materially from those expressed or implied by the forward looking statements.
For a description of some of the factors that could cause actual results to be different from statements. In this presentation. We refer you to the financial results press release and our most recent forms 10.
There's 10-Q and 8-K filed with the Securities and Exchange Commission copies of which may be obtained on our website.
Forward looking statements are made as of today and SJW group disclaims any duty to update or revise such statements you.
You will have the opportunity to ask questions at the end.
K station.
As a reminder, this webcast is being recorded and an archive of the webcast will be available until October 25th 2021.
You can access the press release and the 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 and Eric Thornburg and it is my honor to serve as chairman President and CEO of SJW group.
Coast to coast, we're seeing extreme weather and play out across our service area. This summer underscoring the importance of our environment and water resources.
And California, we're.
The price and 1 of the driest summers in recent memory.
State and regional water supply agencies are responding with urgent calls for conservation.
It's an entirely different story across the country and Connecticut.
After initial concerns of drought and Connecticut, just a few months ago, we have since seen nearly 4 time.
We're seeing normal amount of precipitation just this month.
More than 19 inches of rain has fallen and then 1 of our communities.
People there has experienced flashfloods waterlogged basements and unusually cool temperatures Christmas day, 2020 was warmer than July 3rd 2010.
And so the non and 21.
And all of this on top of the severe deep freeze event, we experienced earlier this year and our Texas operation.
Rate case cycles, and regulatory environments are important to our business, but there's nothing more fundamental and the water cycle and the natural environment.
What are utilities of long understood.
<unk> thousand and importance of protecting water resources and the environment.
And SJW group, our vision calls for us to view our business initiatives through a lens that includes the impact on people communities and the environment.
Our commitment to be a leader across the environmental social and governance ESG.
We stood the landscape is built on our longstanding sense of purpose and our determination to be a force for good and the communities we serve and beyond.
We have employee teams working together across our organization driving this vision forward.
They're working with outside experts to create a comprehensive greenhouse gases.
S trade inventory for our company. So we can establish clear and measurable metrics and quantify our success going forward.
Enterprise Environmental health and safety programs and metrics are also being evaluated with the intent of setting national goals and adopting common compliance and reporting strategies.
Strategies.
As we further our efforts to meet supplier diversity goals. We're also adopting ESG vendor compliance strategies to promote alignment with our company's ESG policies.
We are also forming innovative partnerships with community organizations and.
San Jose.
Cash and we belonged to a collaborative that created a plan to protect nearly 1000 acres of forest and the Santa Cruz Mountains a.
The collaborative was awarded a $7.5 million dollar Cal fire Grant to fund the plan.
Which is designed to protect water sources and established fire resilient.
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And promote the long term sequestration of carbon.
And Connecticut, we're in discussions with 6 communities.
And the preservation of more than 100 acres of land is protected open space additions.
Additionally, we're also evaluating and identifying opportunities to partner with local communities.
And land conservation organizations to establish passive recreation programs on company owned land.
Our commitment to the environment and communities has never been stronger.
Water resources, and California continue to be impacted by the lack of precipitation.
He and 9 valley water, our wholesale water supplier declared a water shortage emergency and asked its retailers, including San Jose water to reduce consumption by 15% compared to 2019 usage.
On June 18, we asked the California public.
On Joel These commission.
Or CPUC to activate stage 3 of our water shortage contingency plan, which calls for 15% mandatory conservation.
The approval for this filing is pending the completion of customer noticing.
Our current conservation.
<unk> is focused on outdoor water use which typically accounts for half of our residential customers consumption.
And it related filing we also requested the authorization to reestablish memorandum accounts to provide regulatory treatment to respond to the drought emergency.
Per last week, the CPUC approved our request to establish the water conservation Memorandum account W. CMA.
The revenue impact of authorized versus actual water consumption, while we have requested customers to conserve.
A water conservation expense.
Memorandum account or WC ebay was also authorized to track the incremental expenses required to implement our mandatory water conservation plan.
Importantly, both memorandum accounts allow for potential future recovery and other revenue and expense impacts.
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San Jose water is actively promoted water conservation for decades and continues to encourage our customers to conserve and use water wisely at all times.
From complementary customer water efficiency visits water wise gardening information.
Conservation tips.
And as well as rebates and incentives we offer a comprehensive program to assist customers with their efforts.
We are also strongly committed to doing what we can to reduce water loss on our side through timely leak repairs and the deployment of innovative technology such as acoustic sensors.
Our zero waste discharge Flushing truck.
While we hope for improving water supply conditions and 2022, we are evaluating ways to further encourage mandatory water conservation, which could include surcharges should the water shortage emergency persist.
And so high ticket, we're pleased that the public utilities regulatory authority or PURA approved our request for conservation rate design.
Connecticut water and they'll be able to encourage conservation by charging a higher tariffs for water when residential customers use more than on average of 200 gallons.
And couldn't per day.
Consumption above that amount is typically related to outdoor use.
PURA also approved our request for a water rate assistance program or rep for income eligible customers.
It still provides for a 15% reduction on the water Bill.
And so we're qualifying customers.
We believe that this we believe this to be the first program of its kind and Connecticut and Theres a great addition to the financial assistance tools already available to our customers.
We are working locally and within the industry to engage with administering agent.
On the low income household water assistance program.
More than $1.1 billion federal dollars will be available to states to pay water and wastewater bills on behalf of low income residents.
We are closely monitoring these efforts and are working to make sure that our customers and all.
Force States can benefit from the program.
I'll now turn the call over to Jim who will review, our second quarter and year to date financial results.
After Jim's remarks, I will address other regulatory and business matters Jim.
Thank you Eric our quarterly operating.
Results benefited from increases in customer usage, and California, and Texas and authorized rate increases and each of our 4 operating and utilities zinc.
Increases were partially offset by a decrease and the availability of surface water supplies and our California service area due to the continued dry weather conditions Eric mentioned.
And the second quarter, we also recognized a purchase price hold back from the 2017 sale of our Texas water Alliance or GWA subsidiary to the Guadalupe Blanco River authority or <unk>.
Second quarter revenue was $152.2 million or $5 million.
And or 3.4% increase over reported second quarter 2020 revenue of $147.2 million.
Net income for the second quarter was $28 million or <unk> 69 per diluted share.
And this compares with $119.7 million or <unk> 69 per diluted.
Share for the second quarter of 2020.
Diluted earnings per share for the quarter is primarily driven by cumulative rate increases of <unk> 14 per share and.
<unk> 11 per share due to release of the $3 million GWA purchase price hold back and.
And increased usage of <unk> per share.
Share. These increases were partially offset by an increase and administrative and general expenses of <unk> 15 per share.
A decrease and California surface water production of <unk> <unk> per share.
And increased production costs of 7 and per share due to higher customer usage.
Turning to our comparative.
Per the quarter, the $5 million increase and revenue was primarily due to $3.6 million and cumulative rate increases and $1.3 million and increased customer usage and and.
<unk> 7 million from new customers.
Water production expense increased $2.8 million.
Compared to the second quarter of 2020.
The expense increase includes $1.9 million for the purchase of additional water supply necessary to replace the low volume of California surface water.
And $1.8 million due to higher customer usage.
These increases were partially offset.
Offsetting by a $700000 decrease and lower average unit.
Water production costs.
As stated in our first quarter earnings call in 2020, 1 we anticipated producing $2.5 billion gallons of surface water from our California watershed, which is representative of our 10 year average surface.
Water production and consistent with the volume authorized and our 2019, California General rate case.
For the first half of 2020, 1 we experienced minimal rainfall and produce less than 260 million gallons of surface water.
Absent additional rainfall, we don't anticipate any additional surface water.
Water production in 2021.
The incremental cost to supplement this shortfall is approximately $4.6 million per billion gallons.
And this replacement cost and estimate includes the 9.1% July 1st rate increase implemented by valley water.
Other operating.
<unk> expenses increased $5.6 million during the second quarter, primarily due to a $3.6 million increase and general and administrative expenses of $1.3 million increase and higher maintenance expenses and depreciation.
And depreciation expense of $800000.
The.
Increase in administrative and general expenses was primarily due to onetime expenses related to our general rate case and cost of capital regulatory proceedings and compensation and accounts receivable activity offset by lower accounting fees.
Other income includes the $3 million purchase price.
Hold back receive from G. B R E. In the 2021 second quarter upon satisfaction of remaining conditions on the company's 2017 sale of GWA and <unk>.
Transaction occurred in 2020.
The effective income rate tax rate for the second quarter was 14%.
Compared to 18% for the second quarter of 2020.
The effective tax rate decrease was primarily due to flow through tax benefits.
Turning to the first 6 months of 2021 revenue was $267 million, a 2% increase over the same period last year.
Net income.
Income from the first 6 months of 2021 was $23.4 million or <unk> 79 per diluted share compared to $22.1 million or <unk> 77 per diluted share during the same period a year ago.
Diluted earnings per share for the year was primarily due to rate increases that contributed.
<unk> 23 per share the tw a purchase price hold back that contributed <unk> 11 per share non.
And on regulated income of <unk> <unk> per share and tax benefits that contributed <unk> <unk> per share.
These increases were partially offset by an increase in general and administrative expenses.
And of <unk> 11 per share.
The decrease in California surface water production of <unk> 10 per share.
And increased depreciation expense of <unk> 10 per share and a decreased production cost of <unk> <unk> per share due to lower customer usage.
Our 2021 revenue year to date increase and revenue.
And it was primarily due to $6.4 million and cumulative rate increases and $1.1 million from new customers.
This increase was partially offset by a decrease and customer usage of $1.5 million winters.
Winter storm customer credits and our Texas service area of $800000.
And a decrease and the recognition of certain regulatory mechanisms and Connecticut, and Maine of $800000.
Water production expenses increased $2.6 million and the first half of 2021.
The increase was primarily due to $2.7 million from decreased surface water and California.
And $1.7 million and higher customer usage.
These increases were partially offset by a $1.5 million decrease and lower average per unit water supply costs.
Other operating expenses increased $7.2 million and the first half of 2021, primarily due to a $2.8 million.
Increase in depreciation expense $2.8 million, and higher general and administrative expenses and $1.4 million and higher maintenance expenses.
First half 2020, 1 other income and expense included the GWA hold back which I previously discussed.
Turning to our capital expenditure.
And Graham, we added $53.4 million and company funded utility plant and the second quarter of 2021, bringing total funded additions for the first half of the year to $100.1 million. We are on track to add approximately $239 million to utility plant in 2020.
Pro on consistent with our 2021 construction budget.
Our first half 2020, 1 cash flow from operation increased approximately $34.8 million over the same period in 2020.
The increase was primarily due to an increase and collections from accounts receivable and accrued unbilled.
Utility revenue of $15.3 million payment of amounts previously invoiced and accrued of $7.3 million and an increase due to net changes and balancing and memorandum accounts of $5.7 million.
In addition, we made an upfront payment of $5 million and the prior year and connection.
And 20 of our city of Cupertino service concession agreement that did not recur and the current year and.
And general working capital and net income adjusted for noncash items increased $1.5 million.
At the end of the quarter, we had $121.5 million available on our bank lines of credit for.
And with her and financing of utility plant additions and operating activities.
The average borrowing rate on the line of credit advances during the first 6 months of 2021 was approximately 1.3 and 9%.
With that I will stop and turn the call back over to Eric.
Thank you Jim.
A short term continues to execute on our core growth strategy of investing and high quality water systems to provide safe and reliable water service to customers and communities and earning a fair return on those investments.
As Jim just mentioned, we've already invested approximately 42% of our planned 2021 capital spending.
There'll be greedy and of the second quarter.
Our cost of capital application was filed in California and May has required.
We are seeking and modest revenue increase of $6.4 million.
The application and also includes an increase and the return on equity from our currently authorized 8.9%.
2 a 10, 3%.
And increase and the equity portion of our capital structure and the proposed decrease and our cost of debt.
The CPUC continues to process, our 2020.2 to 2024 general rate case application that requests a 435 million.
So our capital program and $88 million increase and revenues over 3 years.
Final decision is now expected in the second quarter of 2022.
We plan to file for interim rates that would be in place on January 1.2020 2 until the final decision on the <unk>.
He has issued.
And June San Jose water and the public advocates office filed a joint settlement agreement with the CPUC on our application to deploy advanced metering infrastructure debt.
Approved by the CPUC, we anticipate a capital program of approximately 100.
And dollars spread over the next 4 years.
A decision is expected and the fourth quarter.
The California Commission also authorized a revenue increase of $17.3 million effective on July 1.2021 to recover our wholesalers water rates.
Increase of 9.1%.
About 48 hours ago, and Connecticut, PURA approved an increase of $5.2 million and annual revenues, which is an increase of about $5.1 per cent.
Based on the tone and tenor of the proceedings and the recommendations of the office of.
Consumer Council, we had anticipated a decision more in line with the typical regulatory outcomes and Connecticut.
We're still reviewing and evaluating the decision.
As part of that review, we are assessing options for further consideration of a few tax related items and the case.
In addition.
And we will pursue a regulatory strategy for timely recovery of additional water infrastructure and conservation adjustment or Wicca eligible plant that was not recovered in this case.
And the $40 million and capital investments that were removed from this case.
And so on the basis.
The timing not prudence over half of the capital projects not included in rates as part of this decision our wicca eligible projects scheduled to be completed before year end 2021.
The resetting of the wicker surcharge to zero.
I'll allow us to recover these investments.
Vestments and upcoming filings.
Our next with a filing as planned now for October 2021, and is expected to include approximately $18 million of completed projects.
Based on that timing, we would expect the approved surcharge to be effective in January 2020.
The statute allows for filings every 6 months up to a 5% increase and the annual surcharge with a 10% cap between general rate cases.
Through the water revenue adjustment mechanism, and Connecticut or Ram we are confident that.
To realize the full revenue was authorized in this case and subsequent with the surcharges.
There are other aspects of the decision that were favorable and significant such as the authorization of a capital structure consisting of 53% equity.
In addition, and over a decade of capital investments.
We will we're approved including a number of important environmental projects, such as a significant solar installation and the deployment of acoustic leak detection sensors across select distribution systems.
The Commission and also approved our conservation rates are firm some of the benefits of the merger.
Commended us for proposing our water rate assistance program and.
It was complimentary of our operations and service.
Taking into account the current decision our forecasted earnings remain within our guidance of $1.85.
The $2.5 per share, but are trending toward the lower half of the range.
Vestments.
There has been significant progress on both the construction and the regulatory treatment for Maine, water's $60 million water treatment project.
The new facility alone and the Soco River will replace it's night and 18.84 vintage drinking water treatment plant.
On June 23.
Maine water received approval from the Maine Public Utilities Commission for its innovative rate smoothing mechanism for the Biddeford Soco Division that was effective on July 1.
They are S and provides for a graduated transition to higher rates, helping to mitigate customer rate shock or this signature.
Difficult generational investment.
Customers will pay a surcharge in year, 1 with those payments funding a regulatory liability account, which will later be used to provide credits to customer bills to mitigate the impacts of the full rate increase when the plant is completed and in service and 2000.
2.
Consistent with the original filing and March 'twenty 'twenty 1.
The team is now updating its general rate case filing to recover in base rates, all investment and costs associated with the new facility with new rates expected to start in July 2022.
2000, and we continue to see robust growth at SJW T X and our Texas water and wastewater utility on.
On June 28, and application was filed with the Texas Public Utilities Commission to acquire the Kinder West and Bandera East utilities, which are under common ownership.
And the utilities provided.
Divide water service to approximately 4000 people through 1600 service connections inbound era and the data counties.
If approved by the Texas Commission this would be the 14th acquisition for S. J W. T ex since 2006.
Through organic growth and acquisitions.
We have more than tripled the number of our service connections to over 21000.
With the addition of Kinder West and band are East S. J W. T X would serve 3 of the 5 fastest growing counties and the United States come all Hayes and Kendall counties.
Earlier.
Dear S. J W. T X completed the Clearwater States acquisition, which was the first fair market value acquisition and Texas.
With a diverse portfolio of water supplies and continued additions to customer base through organic growth and acquisitions, we remain optimistic about the prospects for S. J.
And this he ex and it's steadily increasing contributions to consolidated earnings.
On behalf of SJW group I want to thank our employees for their commitment to protect public health.
Protect 1 another and deliver life sustaining water service to families and communities through the pandemic droughts floods.
That'd be a 10 storms.
Our people are resilient and we have confidence that their commitment to serve well overcome current and future challenges.
I would also like to thank Deborah Mann for her service to the company its employees and our shareholders day.
<unk> joined the SJW Group Board and 2016.
And recently announced her retirement from Board service.
I will miss her counsel and contribution to the important work of delivering life sustaining and water service to our customers and communities.
With that I'd like to turn the call back to the operator for questions.
Ladies and.
At this time, if you would like to ask a question. Please press star followed by the number 1 on your telephone keypad.
And and they start 1 well pause for just a moment.
You have a question from the line of Jonathan Reeder with Wells Fargo.
Hey, Jonathan.
Hey, Eric and Jim how are you guys a day.
We're good thank you and thanks for the call.
Yeah, no absolutely I appreciate all the detail provided I missed your commentary just a little bit around our guidance. I think you said you guys are now trending towards the lower end of the range is that right.
And right that's right Jonathan with the design of the rate case.
You know with the worker, particularly excluded the whip eligible plans and there's a few extra pennies a share there that we would have hoped to have recovered with the actual implementation of rates. So that just pushes us out just a little bit.
Right.
So if you look at a full year of the rate case, that's going to add about 15 cents a share.
When you take it all in but the additional work that will come and you had January 1st So we're missing that increment for the last half of the year.
Okay, So and that's related to the Connecticut rate.
And the outcome gotcha disappoint, a clarification on that guidance range to 185 to 205 is that based on ongoing or is that just kind of a full number. So like this quarter. You know I think you said 60 cents.
Ongoing 69, if you include.
You know the.
Rate case, a portion of the 2017 sale gain.
Yeah that would be for all earnings Jonathan and we haven't maybe they've got and just you know distinguishing.
Features of that so yes.
Okay, and then lastly, just wanted to say congrats on getting the W. CMA approved the.
Conservation Memorandum account.
California.
And when is that effective is that effective immediately upon approval does it help you at all and the second half of the year having that.
And why don't I start and Jim you can and supplement this I believe it effective July the 19th forward.
And you know it.
And make sure that we deliver authorized revenues for the.
The rest of the year and our authorized revenues comport nicely with them you know the.
And the.
2019 period. So so it really provides a real good solid.
Floor, if you will for any.
And the conservation related reductions and consumption. So we should deliver authorized revenues Jim.
And that's exactly right, Eric and and and.
To put a point on it.
Forecast our earnings guidance was predicated on authorized revenue.
We'll.
Got you, Okay, well I'll leave it there that's about all I have good luck and the second half of the year as you guys are way.
Wade through the California regulatory items that are on the docket pretty important thing so good luck with that.
Thank you Jonathan yes.
Sure Pat.
Yeah.
Once again, ladies and gentlemen, if you have a question.
Please press star followed by the number 1.
And there are no questions at this time I'm sorry, you do have a question from Richard Sunderland with J P. Morgan.
Hi, good recruiting just.
Just 1 question from me.
Question do Connecticut puts and takes here it sounds like with.
With the weak availability for the capital pulled out of the rate case, you sense, you will catch up in the next year, but just wanted to see if the you.
You don't outcome itself and some of the other.
And on these iterations around the case or changing your thoughts on the regulatory strategy at all in the state going forward.
Yeah. Thank you for the question.
The presiding Commissioner Vice chairman debt cost SKU made clear from the from the bench there that you know.
And the ROE in.
And there can chase was really based and reflects the current economic conditions and not a reflection on the company and.
And of course, it really appreciated that comment and.
And what I would say is as we've looked back over.
Over the last 48 hours thinking about things that you know.
I would.
And this to pay potentially more frequent filings and Connecticut, rather than waiting as long as we did you know we were out of 11 years and for a lot of good reasons, but I think going forward a better strategy for us would be go in and more frequently for lower amounts and and just.
And to go at it in that regard, but the the width of availability and the Ram features all are very capital supportive regulatory tools and so.
So I think the 1 adjustment we would make Richard based on our current thinking we'd be just go and a little bit more frequently.
Understood I appreciate the color there I'll leave it at that thank you.
Thank you I appreciate the question.
There are no additional questions at this time.
Yeah.
Very good operator, thank you and thank you to all those participating on our call today. We appreciate your interest and support and our company we're very proud.
Our organization and executing on our growth strategy and really proud of our long standing commitment to our dividend and 77 consecutive years and 53 years consecutive and increasing that dividend and we thank you for your interest and support we look forward to talking to you and next quarter.
Ladies and gentlemen, this does conclude today's conference call you may now disconnect.
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