Scalper1 News
SJW Corp (NYSE: SJW ) Q2 2015 Earnings Conference Call July 30, 2015 13:00 ET Executives Suzy Papazian – General Counsel Richard Roth – Chairman, President & CEO James Lynch – CFO Analysts Michael Gaugler – Janney Montgomery Operator Welcome to the SJW Corp. Second Quarter 2015 Financial Results Call. [Operator Instructions]. I would now like to introduce your host for today’s conference Suzy Papazian, General Counsel. Please go ahead. Suzy Papazian Thanks Operator. Welcome to the second quarter 2015 financial results conference call for SJW Corp. Presenting today are Richard Roth, Chairman of the Board, President and Chief Executive Officer; and James Lynch, Chief Financial Officer. Before we begin today’s presentation, I would like to remind you that yesterday’s press release and this presentation may contain forward-looking statements. These statements are based on estimates and assumptions made by the company in void [ph] it’s experience, it’s circle trends, current conditions and expected future development as well as other factors 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 description of some of the factors that could cause actual results to be different from statements in the presentation, we refer you to the press release and to our most recent Form 10-K and 10-Q filed with the Securities and Exchange Commission, copies of which may be obtained at www.sjwcorp.com All forward-looking statements are made as of today, and SJW Corp. disclaims any duty to update or revise such statements. You will have the 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 October 26, 2015. You can access the press release and the webcast at our corporate website. I will now turn the call over to Rich. Richard Roth Thank you, Suzy. Welcome everyone and thank you for joining us. On the call with me today are Jim Lynch, our Chief Financial Officer and our Palle Jensen, our Senior Vice President of Regulatory Affairs. SJWs second quarter performance reflected lower usage as a result of water use restrictions imposed due to the California drought, while San Jose water company continues to provide high quality and reliable water service the company has as required by the California Public Utility Commission implemented a drought contingency plan that includes water allocations and drought surcharges for only the second time in the company’s 149 year history. San Jose, water company drought contingency plan established it’s monthly allocation for residential and landscape customers based upon 2013 average use less 30%. The reduction requested by the Santa Clara Valley Water District, Santa Clara counties water resource management agency. In contrast the drought in Texas is officially over as a result of record rainfall in 2015 that helped refill parched reservoirs and aquifers [ph]. SW, Texas [ph] our Texas water utility continues to experience robust organic customer growth since it’s acquisition in 2006 SJWTX has grown from approximately 7000 to 12000 connections owing to an aggressive acquisition program and strong organic customer growth. The pace of organic growth continues to accelerate with June marking a single month record for new connections with strong customer growth, a robust portfolio water supplies and rates in place at least for 2017, we’re pleased with this small but growing part of our SJW. San Jose Water Company’s 2015 general rate case application continues to be processed by the CPUC. Evidentiary hearings to address all remaining unsettled issues took place in June and we expect the timely decision that will establish new rates for 2016 through 2018. In the event of the timely decision is not received San Jose Water Company has filed to activate the interim rate mechanism that would provide the company with interim rate relief, retroactive to January 1st, 2016. Jim Lynch will now discuss more detail, SJW second quarter and year-to-date results as well as other financial matters. After Jim’s remarks I will provide additional information on our regulatory filings and other key operational and business matters. Jim? James Lynch Net income for the quarter was 7.5 million or $0.36 per diluted share. This compares to 6.8 million and $0.34 per diluted share for the second quarter of 2014, year-to-date net income was 12.2 million or $0.59 per diluted share compared to 7.8 million or $0.38 per diluted share for the same period in 2014. Second quarter revenue increased to $72.4 million, a 3% increase over the second quarter of 2014 and for the first six months of 2015 revenue was a 134.5 million or an 8% increase over the first six months of 2014. Our quarterly and year-to-date results reflect the impact of new rates authored by the California Public Utilities Commission last August. The rate increases contributed $11.8 million in new revenue in the second quarter and 20.8 million year-to-date. In addition year-to-date results include 1.9 million an additional first quarter revenue related to the California Commissions decision on the effective date of our 2014 rates. Second quarter and year-to-date results also reflect the impact of lower usage in our California service area as a result of drought related conservation activities. As Rick mentioned the Santa Clara Valley Water District said it’s 2015 water usage target at 30% below 2013 usage levels. This was followed by the CPUCs authorization in June of 2015 to activate San Jose water companies water shortage contingency plan that includes mandatory usage reductions and drought surcharges. Overall customer usage declined 13% in the second quarter resulting in a $9.3 million reduction in revenue compared to the second quarter of 2014. Year-to-date customer usage declined 10% resulting in a $13.2 million revenue reduction compared to the same period in the prior year. Compared to 2013, our usage in our California service area is down approximately 23% through the first six months of 2015. The water shortage contingency plan provides for the establishment of a drought memorandum account to track drought surcharges. Amounts collected in the account will be used to offset future amounts recorded in the company’s mandatory conservation revenue adjustment account or MCRAM, recall that the MCRAM was established to track revenue shortfalls along with the mandatory conservation memorandum account or MCMA account to track operational and administrative cost associated with implementing the water district 2015 and 2014 conservation goals. In March of 2015, the company filed it’s first filing under the MCRAM for the recovery of approximately 9.6 million in authorized revenue lost due to conservation net of the MCMA accounts. The filing covered amount accumulated in the accounts from March 31st 2014 through December 31, 2014. The company will recognize amounts requested in the filing net of certain supply cost balances once collection is authorized by the CPUC. We anticipate authorization will occur during the second half of the year. Future amounts accumulated in the accounts will be recognized once recovery or refund is determined to be probable. The drought memorandum account MCRAM and MCMA will remain in effect until state order drought water restrictions are lifted. Turning to water production second quarter operating results benefited from the use of approximately 550 million gallons of surface water from San Jose Water Company’s Lake [indiscernible]. This compares to less than 60 million gallons used in the second quarter of 2014. Through the first six months of 2015, we used 1.5 billion gallons compared to 92 million gallons in the same period of 2014. The increased surface water supply resulted in a $1.2 million reduction in water production expenses for the quarter and 3.3 million year-to-date. We do not anticipate any meaningful benefit from surface water supplies through the remainder of 2015. Production cost also benefited from lower usage in both our California and Texas service areas. In California due to the drought and in Texas due to higher than normal rainfall experienced in our service area during the first half of the year. As a result of this drought and usage we experienced lower production cost of 7.4 million for the quarter and 8.9 million year-to-date. This benefit was partially offset by the impact of increases in purchase water expense and ground water production charges of 2.3 million for the quarter and 3.8 million year-to-date. Non-production operating expenses included an 800,000 increase for the quarter and $1.6 million increase year-to-date in pension cost. The increase was driven primarily as a result of the decline in the discount rate from December 31, 2013 to December 31, 2014 and new mortality table is used to calculate the expense. In addition both the quarter and year-to-date include higher cost incurred in connection with our 2015 California general rate case and conservation activities in our California service area. Another point of note in the second quarter of 2014 the company recorded a $2 million gain on the sale of certain investment securities and a $880,000 tax benefit on the recognition of enterprise owned tax credits. No similar amounts were recorded in 2015. Turning to our capital expenditure program we added approximately 21 million in utility plant during the second quarter which brings our 2015 total to $37 million or approximately 30% of our 2015 utility plant capital expenditures including our Montevina plant retrofit project we are on target to add approximately a $125 million in utility plant in 2015 growing rate base in both our California and Texas service areas. From a liquidity perspective year-to-date cash flows from operations increased by approximately $20 million or 80% due in large part to higher income and the collection of a $6 million income tax receivable that was generated at the end of 2014. In addition we experienced a $6 million benefit from the collection of true-up revenue recognized in 2014 in connection with our 2012 California rate case decision. We recall that $46.5 million in net true-up revenue is being collected over a 36 month period that commenced in October of 2014. At the end of the quarter we had $76.8 million available under our bank lines of credit for short term financing of utility plant additions in operating activities. The borrowing rate on credit line advances during the second quarter averaged 1.5%. With that I will stop and turn the call back over to Rich. Richard Roth Thank you, Jim. In response to the governor’s and the state water resources control board’s mandatory state wide reduction of 25% for urban water systems. On May 11, 2015 San Jose Water Company filed with CPUC to activate schedule 14.1, an allocation based “water shortage contingency plan with staged mandatory reductions and drought surcharges.” Based upon a 30% reduction from 2013 usage. The activation of schedule 14.1 allowed San Jose Water Company to comply with current CPUC requirements and align restrictions with those mandated by local government agencies thus achieving greater consistency and limiting customer confusion. Although Governor Brown’s executive order caused for a state-wide 25% water reduction, the 30% requested by the Santa Clara Water District the regions water resource management agency more appropriately reflects local water supply conditions. Schedule 14.1 was approved by the CPUCs water division and became effective on June 14th. Subsequent to the approval the office of [indiscernible] advocates requested a review of San Jose Water Company’s drought contingency plan as they did with other Class A water utilities drought contingency plans. Our review request requires the water division to issue a resolution finding the program just and reasonable and we will be subject to approval by the full commission. CPUC action on RAs request will likely not occur until late August at the earliest and until that time the program remains in place as adopted. As you mentioned we have in place the mandatory conservation revenue adjustment memorandum account or MCRAM to track revenue lost due to reduced customer usage resulting from formal declaration of water conservation requirements. This memorandum account provides a high degree of assurance that any loss of revenue, net of production cost resulting from mandatory conservation rules may be required through an [indiscernible] at such time that the memorandum account balance exceeds 2% of annual authorized revenue requirement. Additionally drought surcharges collected under schedule 14.1 will be credited to the loss revenue memorandum account to offset revenues shortfalls associated with reduced water usage. Drought surcharges in excess of lost sales will ultimately be refunded to customers after the drought in the manner authorized by the CPUC. The net effect of the MCRAM is that servicing water company has a strong revenue protection for sales loss due to the drought and related mandatory conservation rules. Both the California and Texas droughts have increased public awareness of the need for investments necessary to ensure adequate, reliable water supply, as well as the need to replace aging infrastructure. San Jose Water Company and SJW have been industry leader in making necessary and prudent investments in utility plan. SJW’s capital improvement plans is approved by the CPUC and the Public Utility Commission of Texas provided necessary rates to support investments totaling $108 million and rate based capital expenditures in 2015. These prudent capital outlays will replace mains, wells, reservoirs, and other critical infrastructure. To further emphasize this important point, SJW has from 2010 through June 30, 2015, and thus approximately $471 million in utility plan. Furthermore, SJW expects to invest subject to regulatory approval, an additional $662 million as part of our core capital improvement programs for 2015 throughout 2019 to ensure our water systems continue to deliver safe reliable and high quality water service to our customers. These investments directly correlate to an increase in rate base, the earnings for investor owned utilities. Additionally, in July, San Jose Water Company signed a definitive agreement to rebuild the Montevina Water Treatment Plant by employing a progressive design build approach along for operational flexibility. The company will be able to continue to optimize the use of available surface water during construction. Rate recovery is processed via annual advise set of filings and through completion in 2017. This project is on track to add a total of $62 million to utility plan. Structural water supply challenges are requiring SJW to quickly and effectively adapt to new mandates in usage patterns. SJW recognizes the critical need to engage in farm customers and other stakeholders of these mandates, how conservation efforts impact rates and the value of water. To that end, San Jose Water Company is executing a comprehensive customer communications program that speaks to these needs via a variety of communication platforms. Web based communications offer an effective and efficient tool to deliver timely and relevant customer information. San Jose Water Company is now six weeks into its draft contingency plan and we are pleased with the positive impacts our enhanced communication efforts are producing. San Jose Water Company recognizes that it is widely important to deliver exceptional customer service at all times, especially during the drought when we have asked our customers to increase their conservation efforts. Accordingly, we are continually analyzing and refining our business processes to find the resources required to comply with hiding regulatory oversight, address structural water supply challenges and continue to provide excellent water services at a reasonable price. Although there may be some regulatory lag in receiving final authorization to collect revenue due to loss sales, I believe SJW will emerge from the drought a better and stronger company, both financially and operationally. In dealing with the current drought, SJW has been forced to be operationally more flexible and innovative switching between various water supplies adapting to different levels of search water quality and effectively operating our water systems in widely varying conditions. Additionally, SJW recognizes that customer communication must now be a core competency. We are clearly on our way to building a first class customer communications function using multiple communication modalities. We are also making significant progress in increasing the speed and efficiency of customers interactions. Digital transactions now comprise the vast majority of all transactions at SJW. In summary, SJW are much from our experiences dealing with the drought which has furthered our capabilities to succeed and transfer demanding and difficult business and regulatory environments. Our systems are efficient and in good conditions, our investments have been prudent, and our business model is intelligent and durable. Over the long haul, SJW should continue to enjoy sustained growth and profitability, earnings and dividends for our shareholders. With that, I will turn the call back to the operator for questions. Question-and-Answer Session Operator Thank you. [Operator Instructions] And our first question comes from Michael Gaugler from Janney Montgomery. Your line is now open, please go ahead. Michael Gaugler Good morning, everyone. Richard Roth Good morning, Michael. Michael Gaugler Rich, something you didn’t really touch on and I guess it’s probably just because of the drought, is the real estate operations. And I want to appreciate an update there on what you’re thinking in terms of that line of the business? Richard Roth Sure. Michael, we’re in the process of gradually getting out of the business of real estate. We have some properties that are already in the process of being marketed and sold, and other ones for variety of reasons would be sold over the course of time. I think the critical factor here is just when the market is right, we don’t have to sell these assets but we will sell those assets when the market is right and when an attractive offer comes along. So, we think that the proceeds from the real estate will likely be reinvested in utility plan. We think that’s our core competency and so we’ll be gradually moving out of that business. Michael Gaugler Okay. That’s all I have. Thanks, Rich. Richard Roth Thanks. Operator Thank you. [Operator Instructions] And I’m not showing any further questions at this time. I would now turn the call back to management for any closing remarks. Richard Roth Thank you, and thank you everyone for listening. And we look forward to talking to you at the end of the third quarter. Operator Ladies and gentlemen, thank you for your participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone, have a great day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you! Scalper1 News
Scalper1 News