Q1 2022 SJW Group Earnings Call
Good day and thank you for standing by welcome to the first quarter financial results 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.
Ask a question during this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to James. Please go ahead.
Thank you operator welcome to the 2022 first quarter financial results conference call for SJW group.
I will be presenting today with Eric Thornburg Chairman of the Board, President and Chief Executive Officer, and Andrew Walters, Chief Financial Officer, and Treasurer for.
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 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.
<unk> that the company believes are appropriate under the circumstances.
Many factors could 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 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 SJW 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 of the webcast will be available until July 27th 2022.
You can access the press release and the webcast at our corporate website.
I will now turn the call over to Eric Thornburg, Eric Welcome.
Welcome everyone and thank you for joining us I'm, Eric Thornburg and it is my honor to serve as chair President and CEO of SJW group.
It is my pleasure to be joined on this call by Jim Lynch, Chief Accounting Officer, and Andrew Walters Chief Financial Officer.
After my initial remarks, Jim will review, our financial results for the quarter that delivered <unk> 12 per diluted common share compared to nine in the same period last year.
Andrew will then discuss our California water supply status later in the call. He will also provide an update on regulatory developments and share our financial guidance for 2022.
We're fortunate to lead the employees of SJW group across all of our four states, who are passionate about delivering a reliable supply of high quality drinking water and wastewater services for the families and communities that we're privileged to serve our people continue to deliver for customers communities shareholders and each.
Other.
In early 2022, we focused on laying the groundwork to deliver our 2022 financial and ESG goals successfully.
Some of our achievements include reaching a settlement agreement in San Jose Water's 2022 General rate case with the public advocates office and receiving approval from the Maine Public Utilities Commission on the settlement agreement between Maine Water company and the public advocates office for the Biddeford Soco's dip.
Vision, new $60 million drinking water treatment facility.
Through the winter months, we continued investing in drinking water infrastructure. Just this week, Connecticut water filed an application with the Connecticut public utilities regulatory authority to begin recovery of $10 million and completed drinking water infrastructure projects Andrew will discuss this later in detail.
We strengthened governance around our ESG commitments through the creation of an ESG Council. The council is made up of executive leaders state Presidents and senior managers, representing ESG initiatives within the organization.
It will provide the framework for the prioritization and reporting on delivery of projects initiatives and investments as it related to environmental social and governance initiatives and we will track our progress towards established ESG goals, such as our pledge to reduce scope, one and two greenhouse gas.
Emissions by 50% by 2030, using a 2019 baseline we will hold ourselves accountable to report on existing commitments and create meaningful new goals.
Our ESG scores are strong.
Rates are governance at its best ratings.
Among our water utility peers were tied for first in social and tied for second and environment.
One example of our ESG commitment is our new Soco River drinking water resource center in Maine.
We've set aside 250 acres of land near the facility has protected open space and conducted wetland restoration on the property.
<unk> have been executed for the installation of the solar photovoltaics.
Photovoltaic array that will offset 100% of the energy needs of the new facility.
Development is underway for a Pollinator garden and a trail for passive recreation.
The facility itself was designed using the envision framework a joint collaboration between the softness program for sustainable infrastructure at the Harvard University Graduate School of design and the Institute for sustainable infrastructure.
I'm also quite proud of our DDI progress.
We've been successful in recruiting and retaining a diverse workforce throughout the organization.
Of our 771 employees approximately 35% of our employees are people of color nearly two thirds are under the age of 50 and women are about one third of our total workforce.
Our supplier diversity program has also taken root.
Building on our successful program at San Jose water, our diverse spend across all four states continues to increase with more than $55 million placed with diverse suppliers in 2021, which is 21% of our addressable spend.
Great progress and our strong commitment to continue this important work.
I'll now turn the call over to Jim who will review our financial results Jim. Thank you Eric.
Our first quarter 2022 operating results reflect new revenues authorized in each of our four operating utilities, new customer growth, primarily in Texas and increased customer usage when compared to the first quarter of 2021 and.
In California, we experienced an increase in residential customer usage due to lower than normal precipitation coupled with warm temperatures.
Business usage in California was lower by 5% compared to the first quarter of 2021.
In California, we continue to follow the mandatory call for conservation declared by Valley water, our wholesale water supplier for a 15% reduction in water use compared to 2019.
Also in the first quarter, we benefited from the recognition of a property sale, partially offset by the onetime impacts of depreciation in our California concession assets.
<unk> related to our 2018 billing order instituting investigation or Oi settlement, and certain deferred and acquisition related tax expense true ups.
First quarter revenue was $124 $3 million, an 8% increase over the first quarter of 2021.
Net income for the quarter was $3 $7 million or <unk> 12 diluted earnings per share, which is a 43% increase over the first quarter. Prior year net income of $2 6 million or <unk> <unk> diluted earnings per share.
The net change in diluted earnings per share for the quarter was primarily attributable to cumulative rate increases of <unk> <unk> per share new customers of <unk> <unk> per share and increased customer usage of <unk> <unk> per share.
In addition, we recorded a nonrecurring gain on the sale of non utility property of <unk> <unk> per share.
These increases were partially offset by an increase in production costs due primarily to unit price increases of <unk> <unk> per share increased.
Depreciation of <unk> <unk> per share and other expense items of <unk> <unk> per share.
Our first quarter revenue increase was primarily the result of $5 $2 million in cumulative rate increases.
$2 5 million from new customers and $1 8 million increase in customer usage.
As Eric mentioned, we have filed a settlement on our California General rate case, we expect to receive a decision in the third quarter of 2022.
Once received we will apply the GIC decision retroactively to January one 2022 as provided for under our approved interim rates decision.
Total 2022 first quarter water production cost increased $2 $7 million compared to the first quarter of 2021.
The increase was primarily due to $4 $5 million and higher average per unit cost for purchased water and groundwater extraction and energy charges.
Partially offset by a $1 $8 million increase in surface water supply production.
Andrew will talk about our surface water outlook, a little later in our call.
Other operating expenses increased $3 $3 million or 3% for the quarter, primarily due to $4 2 million in higher depreciation related to utility plant additions and our California concession assets higher administrative and general expenses of $3 $3 million primarily due.
Increases in labor and pension expenses and increases in maintenance and taxes other than income taxes totaling $1 2 million.
These increases were partially offset by the recognition of a $5 $5 million gain on the sale of non utility property.
No similar gain occurred in the first quarter of 2021.
The increase in maintenance expense reflects approximately $400000 of expenditures on projects constructed personal into a settlement agreement approved by the California Public Utilities Commission on February 27, 2020 in connection with the billing practices.
<unk> issued by the CPUC in September of 2018.
The settlement includes a requirement for the company to invest $5 million in utility plant that is not allowed in investment rate of return or rate recovery.
The company's investment will focus primarily on GHT projects, specifically in the area of solar panel installations we.
We expect to incur $2 million of additional project costs related to the Oi settlement in 2022, and the remaining balance in 2023.
The effective consolidated tax rates for the quarters ended March 31, 2022, and 2021 were approximately 22% and a negative 52% respectively.
The higher effective tax rate for the quarter ended March 31, 2022 was primarily due to discrete tax expense items, including a true up of certain deferred income taxes.
Turning to our capital expenditure program, we added $43 $7 million in company funded utility plant during the first quarter of 2022.
This represents 20% of our total 2022 planned capital expenditures.
From a financing perspective first quarter 2022 cash flows from operations increased 36% over the first quarter of 2021.
This change was primarily the result of an increase of $6 $9 million and regulatory assets, primarily due to balancing and memorandum account activities.
<unk> of amounts previously invoicing accrued increased $5 2 million and other changes increased a net of $2 8 million.
Merrily due to funds received from the state of California, water and wastewater Arrearages payment program.
General working capital and net income adjusted for noncash items increased by $2 6 million.
These increases were partially offset by a decrease in collections of accounts receivable and accrued unbilled utility revenue of $3 4 million and a decrease in the net collection of taxes receivable of $2 2 million.
At the end of the first quarter, we had $184 million available on our bank credit lines for short term financing of utility plant additions and operating activities.
The average borrowing rate on our line of credit advances during the quarter was approximately $1 six 4%.
With that I will stop and turn the call over to Andrew.
Thank you Jim.
Our board has authorized a $223 million capital spending plan for 2022.
Nearly half of it is allocated to pipeline replacement projects.
The plan includes budgeted investments up $115 $1 million in California.
$61 $4 million in Connecticut.
One $8 8 million in Maine, and $24 5 million in Texas.
The wicker and whisk infrastructure recovery mechanisms in Connecticut, and Maine, respectively in California, It's forward looking spending authorization as well as the growth in customers in Texas minimize regulatory lag on these infrastructure investments.
San Jose water company's 2021, Trc application for new rates in 2022 through 2024 is pending before the CPUC.
<unk> and the public advocates office filed a settlement agreement resolving all issues in the proceeding on January 13th 2022.
Which will be considered by the CPUC for adoption.
The settlement provides a revenue increase of approximately $54 million over the three year period with an increase of approximately $25 million in 2022.
The settlement also recognizes the need for continued investments in the water system to deliver safe and reliable water service.
Providing authorization of a three year $350 million capital budget.
Additionally, further aligns authorized and actual consumption, particularly for business customers.
Addresses our water supply mix volatility and provides greater revenue recovery and the fixed charge.
A decision is expected in the third quarter of 2022.
With interim rates in place, we will be able to apply the rate increase adopted in the commissions final decision retroactively to January one 2022.
The 2022 to 2020 for cost of capital proceeding for the for large class a California utilities is also pending before the CPUC that.
The application requests an increase in revenue to support a return on equity of 10, 3%.
An adjustment to the proposed capital structure of 50, 455% equity and 45, 45% debt, partially offset by a decrease in the cost of debt to 548%.
A decision is expected in the third quarter of 2022.
San Jose Water's advanced metering infrastructure application is pending before the CPUC as well.
An all party settlement agreement with submitted to the CPUC for adoption that would authorize infrastructure investments of approximately $100 million over four years.
Outside of the capital budget request and the ERC to deploy Ami.
<unk> is anticipated in the second quarter of 2022.
In Connecticut, we filed an application with the Connecticut public utilities regulatory authority on April 26 2022.
Requesting recovery of approximately $10 million in completed projects through the water infrastructure and conservation adjustment mechanism.
Yes, if approved by PURA as proposed the new Wicca would be effective on July one 2022, and we generate about 900000 annualized revenues.
In Maine on April five 2022, the Maine Public Utilities Commission approved a stipulated agreement between the company and the office of public advocate that recognize all project costs.
Such a nine 7% return on equity across all of Maine Water's Division.
And $6 3 million increase in annual revenues and the bidder for Tsakos Division July one 2022.
The settlement agreement was the second step in a multiyear rate plan. They gradually raises rates for the new $60 million drinking water treatment facility in the bidder for Soco Division.
The new facility is scheduled to go online in the coming weeks and will replace the 138 year old treatment plant.
The first step of an innovative rate smoothing mechanism that was approved by the NPC last summer.
Third step and last filing associated with the new treatment facility is expected to be in the second half of 2022.
Maine water received and PUC approval for a 3% increase in whisk effective January one 2022 for <unk> inhibition and.
In February 2022, the company filed a rate case applications in four of its divisions.
We continue to see our pipeline.
Of growth opportunities and SJW, TX, Texas.
Texas water and wastewater utility.
On January 20th 2022, SJW, TX closed on the acquisition of Texas country water in January 2022.
Overall the company now serves more than 24000 service connections between Austin, and San Antonio and three of the five fastest growing counties in the United States from all pace and Kendall counties.
<unk> has more than tripled its customer base over the past 15 years, providing service to about 70000 people today.
With a diverse portfolio of water supplies, a growing wastewater business and continued additions to the customer base through organic growth and acquisitions, we remain optimistic about the prospects for SJW, TX and its increased contributions to consolidated earnings.
The traditional rainy season in California has ended after.
After a promising start in late fall of 2021, we experienced unusually dry weather through the rest of the season.
While drought conditions persist the current level at Lake Allison with additional inflows throughout the year will likely support approximately $1 8 billion gallons and total production for 2022.
As shown on this chart Lake Elfman is slightly above the five year average and significantly higher than the same period of 2020 and 2021.
This should bring total surface water supply production in 2020 to close to or at the volume and the <unk> settlement.
We are announcing 2022 guidance of $2 30 to $2 40 per diluted share.
Our guidance assumes CPUC approval of San Jose Water's General rate case settlement agreement.
Mentation of Maine, Water's MPC approved stipulation agreement for that better for truckload Division on July one 2022.
And completion of the four other divisional Trc's in Maine in 2022.
Finally, it also assumes an equity issuance of $30 million to $40 million in 2022.
With that I will stop and turn the call back over to Eric.
Andrew It's will.
Deep appreciation and respect that SJW group bids farewell to board member Kathryn Armstrong. Following her 13 years of dedicated service to the company.
Since joining us in 2009, Catherine has guided our investments in her beloved state of Texas as well as elevated the company's commitment to the environment and community engagement.
On behalf of the board in all of our employees, we wish her the very best.
In summary, SJW remains an attractive investment with a focus on designing building and operating high quality regional water service platforms that we believe will sustain attractive long term returns for our shareholders.
Our investments are smart and enduring and we are confident over the long haul that the investments we have made will contribute to growth and profitability earnings and dividends with that I'd like to turn the call back to the operator for questions.
Thank you.
If you wish to ask a question. Please press star followed by one on your thoughts John telephone. If your question has been answered or you wish to withdraw your question.
Again to ask a question.
Our one.
On your telephone keypad.
Your first question comes from the line of Richard Sandra Zhang with Jpmorgan. Your line is open.
Hi, good morning, Thanks for the time today.
Yes, Hi, Richard and good morning.
Yes.
I wanted to unpack guidance, a little bit in some of the assumptions, there and maybe starting with cost of capital.
The debt reset contemplated in guidance and how are you treating the ROE assumptions in there.
Richard Thats, an excellent question.
As it relates to the cost of capital.
That reset is contemplated in the guidance because that's what we've asked for so we don't expect to get anything more than we've asked for it.
As it relates to the ROE.
As her under ongoing discussions so I won't comment, but we have not added anything specific to that.
Got it.
And then.
Thinking about some of the moving pieces on the quarter and how they relate to guidance as well could you speak to I guess the gain on sale and the OIS.
Settlement expense soon.
If those items are.
In or out of guidance and then I guess similarly.
The one time items.
Called out as well in the aggregate.
Sure So I'll take that rich and basically the items that we have included in our guidance include all the one time items that have been incurred to date. They also include the <unk> that Jim mentioned earlier in the call as well so it should be reflective of everything that we know of as of today.
Got it.
That's very helpful. So just just to put some numbers around this I guess the.
The gain on sale was $5 5 million and then it sounds like the OID.
Aggregate from 'twenty two.
Two $4 million offset.
As well as the.
<unk> of one time items I guess to the positive is that am I thinking through the pieces correct or maybe if you could just run through the math for me that'd be helpful. Sure.
Also.
As Jim for any anything that I Miss here, but the to.
First of all starting off with the $5 $4 million related to the sale of that it's offset by.
At least not in the earnings I'm talking about for the guidance.
The $2 $4 million that was related to the <unk> of which 400000 was already.
<unk> four in this first quarter.
And that <unk>. So there is a remaining $2 million to be incurred for the rest of the year and that <unk> was the positive.
After the offsets for depreciation and some of the other items that Jim has highlighted in his discussion earlier I don't know Jim if you want to comment on anything specifically to the other offsets yes. Richard This is Jim Jim Lynch. So in terms of the actual quarter. There were a couple of items that were onetime in nature.
One was a depreciation charge that related to our <unk>.
22, well that related to our lease concession.
In California.
And then another had to do with some tax true ups that we needed to do relative to deferred taxes. So those have been baked in both to the quarter results and the guidance that Andrew was referring to earlier.
Okay understood very helpful. Maybe one last one from me just around the 22 equity any sense on timing or how you expect to address that.
Yes, we have.
The ATM in place right now and we're certainly going to.
Look at the needs of the company and when they are.
They're kind of directing us towards that type of an issuance, but we'll also be watching the market, we want to make sure that when we do.
Raise that equity it's at a time when when the stock is performing.
At a high level and a comfortable level. So we have some flexibility in terms of the timing there.
Okay, Great I appreciate the color. Thank you.
Thank you Richard I appreciate the questions.
Next question comes from the line of Hudson Dozer, whether asset management. Your line is now open.
Hi, good morning, gentlemen.
Couple of questions. The first is I heard your commentary about the.
Roger purchase storage embedded in the New Jersey settlement that makes sense, the one 8 billion gallons.
Understood, but my question is currently.
Before the new <unk> implemented because the decision probably comes out in the third quarter, but obviously, we are going to be in the summer beforehand, and if I'm not mistaken currently in euro rates the amount of gallons embedded is about $2 5 billion gallon not one eight.
So my question is for <unk>.
Before the <unk> implemented in this summer how much water do you expect to purchase.
<unk> or millions of gallons relative to the existing.
So that's in your rates, which I believe it's $2 5 billion gallons. That's my first question.
Sorry can I just make sure I understand your question <unk> are you asking for what next year next quarter's purchase of water is going to be specifically before we come to a final decision potentially by the end of the quarter.
Sure.
Thank you.
Any delays in the CPUC I mean, there is no guarantee that the CPUC will have a decision, but you will be.
I mean, the CPUC decision could move.
One month, two months, what not what I'm trying to understand.
We did about forgetting about the.
Mimi JRC.
We don't have real visibility on the timeline that could shift what im trying to understand is.
Based upon your available water storage do you have a plan as to how much wider youre purchasing.
Going into the summer that's kind of the essence of the question.
Yes.
Yes, how many thousands or millions of gallons do you expect to purchase.
In the next three four months going into this summer.
Thanks, John for your question and the clarity helps.
Don't forecast that we havent disclosed any numbers on that but I think what's most important is that the.
Settlement agreement includes a full cost balancing account for water supply.
And if approved that would be retroactive as well to January one. So we've successfully negotiated a reduction in our supply mix from the $2 5 billion of our own.
Surface water production to the one eight which we believe is really.
Beneficial to our shareholders, but also to our customers because in the years in which we do have abundant rainfall in and even perhaps just slightly above normal than anything.
There would be a balance between <unk>.
Shareholders and customers reflected so we're really ultimately would be agnostic as to.
What that water supply number was as a result of the settlement.
So that's the best way to think about that is that it will be reflected back to January one.
Okay Mike.
Two remaining questions. The second one is what is the tax rate.
In the guidance because I know the first quarter tax rate is a little bit hard to understand so im just trying to understand.
We have a normal tax rate for the year and what's kind of embedded in the guidance. That's my second question on tax rate.
Sure.
Hassan.
We typically don't necessarily forecast all the details around the tax rate because there are a lot of different moves throughout the throughout the year, but.
We're at 16% and our forecast for now.
Got it and my final question just as a follow up to the first question, where you were answering the gain on sale and the other one time items, Mike Matt as I was following your answer comes out to about 10 seconds, you have about 30 million shares outstanding roughly <unk>.
Is that fair.
Ballpark estimate in terms of if I add up the gain on sale of $5 million, then subtract the 2 million net.
And the other depreciation.
Appreciation items I get to about a <unk> <unk> positive impact from those items.
Is that ballpark calculation and if not what is the right.
EPS.
<unk>.
Typically one time items, yes, so on the one time items.
There was also as I mentioned the deferred tax.
Item that was driving the tax rate up above the 16% that Andrew just mentioned to 22%.
We did state both in our earnings release and on the call. This morning that the.
The one time items basically netted to a <unk>.
<unk> Delta and that from a recurring basis, we were at a nine <unk> as compared to <unk> in the prior year also I would remind you of the.
The statements that we made earlier on our call.
That the <unk>.
Rate case in California has not been baked into the results in the current year. So we are experiencing 2020 expenses and increases related to 2022, I should say 2022 expenses and the increase is related to.
To our operations that occurred in 2022 without having that.
The income recovery from that so.
That's how I would kind of think about one where we wound up in the first quarter and what we will be looking at as we move into the second quarter.
And Hassan just.
To kind of make it.
Very easy to think through it if you take the <unk> that Jim talked about and then you also talk about the ongoing $2 million from the OSI. That's what you would look at from what's been done to what's included in the in our guidance.
So all the onetime items are already included plus an additional $2 million.
Included for their Yi.
Okay. Thank you everyone appreciate it.
Youre welcome. Thank you Hassan.
Thank you and you ask a question. Please press star followed by one on your thoughts on telephone.
Your next question comes from Jonathan Reeder with Wells Fargo. Your line is open.
Hey, good morning.
I guess I'll try to ask this on the last question was a little differently.
With the $2 30 to $2 40 guidance range be if you just exclude all the one time items that are known <unk> anticipated throughout the year.
Go ahead, Tim I would I would suggest that you would take the <unk>.
Way to get it to the <unk> for the quarter.
If you take a look at for the year.
You would add back the $2 4 million on a.
The cost.
Cost of capital, so that would be adding back an additional.
<unk>.
Roughly.
I'm going to say, it's <unk> for ease of discussion so it would be right about right around the 240 <unk>.
<unk> hundred 44%, 45% range.
On the upper range and the same on the lower range at roughly three to four.
Okay.
And then I guess I am confused.
$5 5 million gain.
How does that translate into only 7%.
Alright, that's 18 tons on a pre tax basis.
So in that particular part of the discussion, we're referring to a comparison between the prior year.
Current year and that comparison is done on an earnings per share basis.
So recall that we had a pretty big swing in taxes.
So thats showing what the actual tax.
Tax impact was.
To that 14% to 15 pre.
Pretax for share gain.
Our item I should say not gain.
Okay.
Okay.
Okay.
And then.
Hi, guys.
The last question I guess.
I think you've kind of already answered this.
<unk> from continuing ops that doesn't reflect any assumed benefit from the pending.
CRC settlement right.
That's correct.
Okay.
Any way to tell us how much that would additive.
We would assume that in there.
Yes, it's a great question. If you if you look at the <unk>.
Obviously depends on the allocation through the year, but I would add from a revenue perspective, approximately $4 million.
The key to focus on is you've got 25% for the year and it's just based off the allocations, but based on where we are at about a $4 million at.
Okay, Alright, thank you I appreciate it.
That.
There are no further question at this time presenters do you have any closing remarks.
Yes. Thank you operator, thank you all of you for joining our call today, we really appreciate your interest and support of San Jose Water Company and SJW group.
We look forward to keeping you updated on our progress throughout the year and again. Thank you very much for participating in our call today.
That concludes today's conference call. Thank you all for your participation you may now disconnect.
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Okay.
Yes.
Okay.
Yes.
Sure.
Okay.
Yes.
Okay.
Yes.
Okay.
Okay.
Yes.
Yeah.