SJW’s (SJW) CEO Richard Roth on Q4 2014 Results – Earnings Call Transcript
SJW Corp. (NYSE: SJW ) Q4 2014 Results Earnings Conference Call February 20, 2015 1:00 PM ET Executives Suzy Papazian – General Counsel Richard Roth – Chairman, President and CEO James Lynch – Chief Financial Officer Palle Jensen – Senior Vice President, Regulatory Affairs, San Jose Water Company Analysts Operator Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2014 SJW Corp. Earnings Conference Call. My name is Lisa, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Suzy Papazian, General Counsel. Please proceed. Suzy Papazian Okay. Welcome to the full year and fourth quarter 2014 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 only projections and actual results may differ materially. For a description of factors that could cause actual results to be different from statements in the release and in this 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. 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 will be available until April 27, 2015. You can access the release and the webcast at the corporate website, www.sjwcorp.com. I will now turn the call over to Rich. Richard Roth Thank you, Suzy. Welcome, everyone, and thank you for joining us. I am Rich Roth, Chairman and CEO of SJW Corp. On the call with me today are Jim Lynch, Chief Financial Officer of SJW Corp.; and Palle Jensen, Senior Vice President of Regulatory Affairs of San Jose Water Company. As Jim will discuss in further detail, SJW delivered solid results for the year, despite continuing water supply challenges in both of our utility service areas. Further, looking back at 2014, SJW made substantial progress that I believe will lead to a better and stronger company at every level. San Jose Water Company, our flagship utility received its long overdue but constructive General Rate Case decision for the three years 2013 through 2015. The decision provided much-deserved earnings relief and validated the company strong sensible and systematic investments in infrastructure. Accordingly, nearly $90 million was invested in utility plant during 2014, upgrading critical infrastructure, improving service levels and increasing gross utility plant and service to more than $1.3 billion. These investments directly correlate to an increase in rate base which in turn could contribute to earnings for many years to come. SJWTX, Inc., our Texas water and wastewater utility has experienced growing demand for new services. SJWTX’s growth and earnings potential continues to mature owning to our efficient regional business model, economical business processes and a strong acquisition program. Customer count and gross utility plan have increased by nearly 60% and 300%, respectively, since we acquired the business in 2006. With our diverse portfolio of water supplies, a growing wastewater business and continued additions to customer base both through organic growth and acquisitions. We continue to be optimistic about the prospects of expanding our Texas operations. I will now turn the call over to Jim who will review our financial results. After Jim’s remarks, I will address regulatory matters and provide additional perspective on key operational and business issues. Jim? James Lynch Thank you, Rich. Net income for the quarter was $6 million or $0.28 per diluted share, compared to $5 million or $0.23 per diluted share for the fourth quarter of 2013. Year-to-date net income was $52 million or $2.54 per diluted share compared to $22 million or $1.12 per diluted share for 2013. Quarter and year-to-date results reflect the impact of our California General Rate Case decision, the ongoing California drought and newly elected tangible property tax regulations. As previously noted in August, we received a final decision from California Public Utilities Commission or the CPUC on our 2012 general rate case application. The decision authorized a 9.8% revenue increase for 2013 that became effective in August 2014 and a 5.2% revenue increase for 2014 that became effective at the end of September. The decision also authorized a surcharge adjustment for the retroactive application of a newly adopted rate to January 1, 2013, the day interim rates initially went into effect. The surcharge totaled $47 million, of which approximately $25 million related to 2013 and $22 million to 2014. We recognized a surcharge revenue in the third quarter, offset by approximately $3 million in balancing and memorandum accounts, included in the decisions that were previously recognized. For 2015, the third and final year covered by the decision, we received authorization to implement a 2.9% rate increase that went into effect, January 1st. Rich will provide more color on our rate case application for 2016 through 2018 in a few moments. The end of 2014 marks our third consecutive year under historic drought conditions in California and our first year of operating under a targeted 20% reduction in water use set by the State Water Resources Control Board and the Santa Clara Valley Water District. Water consumption for the quarter was down 19% compared to the same quarter in 2013. Year-over-year consumption was down 10% and when compared to authorized annual usage, consumption was down 8%. Recall that the company established memorandum accounts with the CPUC in March 2014 to track the financial impact of conservation for future recovery. The memorandum account balances will be recognized by the company once profitability recovery can determined, and finally collection is assured. In 2014, we also established our method of complying with capitalization elections in the tangible property regulations issued last September by the IRS. As a result, we changed our policy for capitalizing certain asset improvement cost. This resulted in the $16 million reduction in federal income taxes payable for the year with the commensurate increase in federal deferred income tax liabilities. For state income tax purposes, the adoption resulted in a $5 million reduction in state income taxes payable and a commensurate state income tax benefit. The reduction in federal and state income taxes payable included $13 million and $4 million, respectively related to 2013 and prior years. Fourth quarter revenue was $69 million, an increase of 3% over the fourth quarter of 2013. Year-to-date revenue was $320 million, an increase of 15% compared to the same period in 2013. The increases were primarily due to the new rates provided in California General Rate Case decision and for the year the general rate case true-up and higher rates related to pass-through water cost increases from the Santa Clara Valley Water District of approximately 9%. These increases were partially offset by lower customer usage and the impact of certain balancing and memorandum accounts. Water production expense for the quarter was $27 million, a decrease of $3 million over the fourth quarter of 2013. The decrease was attributable to a $5 million decline in usage, partially offset by higher cost for purchase water and groundwater extraction charges and essentially no available service water supply. For the year, water production expense was $123 million, an increase of $2 million over 2013. The increase was due to higher cost of purchase and groundwater of $8 million and $5 million due to a decrease in available service water supply, partially offset by an $11 million decrease in customer usage. Operating expenses excluding production costs were $27 million in the fourth quarter, an increase of $720,000, when compared to the fourth quarter of 2013. Higher depreciation and maintenance expenses during the quarter were offset by lower general and administrative expenses due primarily to lower pension costs. Year-to-date, 2014 non-production operating expenses were essentially flat compared to 2013, due to the same factors. Non-operating income and expenses for the quarter were also essentially flat, when compared to fourth quarter of 2013. Year-over-year, non-operating income and expenses included a $2 million gain on the sale of California Water Service Group stock and gains on the sale of real estate investments in Texas and California, totaling $600,000. The effective tax rate for the quarter and year was 50% and 33%, respectively, compared to 32% and 39% for the same two periods in 2013. Fourth quarter 2014 income tax expense includes a reduction in the state income tax benefit related to the adoption of the IRS tangible property regulations to true-up the previous tax estimate and an increase in income tax expense related to fixed assets. In addition for the year, income tax expense includes the credit of $880,000 related to California enterprise zone sales and use tax credits. Turning to our capital expenditure program, we added approximately $22 million in utility plant during the fourth quarter, bringing our total additions for the year to more than $91 million. In 2014, we completed essentially all of our planned capital expenditure programs. In addition, for the fourth quarter, we added $3 million in developer funded capital projects, bringing our total for the year to $10 million. By the end of 2014, utility plant investments in California and Texas increased to $1.3 billion and $97 million, respectively. With that, I will stop and turn the call back over to Rick. Richard Roth Thanks, Jim. The California drought, now going on its fourth year continues to be an issue of concern for us, for our customers and state regulators. On December’s record rainfall and recent storm a very good start, it may take many years above average precipitation for our water supplies to normalize. As Jim mentioned, rules limiting certain outdoor water usage were adopted in July 2014 by the State Water Resources Control Board. The Santa Clara Valley Water District are also a water supplier has also asked all of its retailers to continue to curtail water use to ensure adequate supplies are available in 2015 and beyond. While the lack of precipitation is challenging, we anticipate San Jose Water Company’s water supplies to be adequate this year, owing to our diverse portfolio, which in addition to treated imported water includes groundwater and drought-tolerant recycled water. Customers in California have clearly done a remarkable job of conserving and helping stretch our precious water supplies in response to calls for conservation. However, lower water sales ultimately result in higher rates for all water customers, a rates conservation nexus that continues to perplex and frustrate. To maintain the high service and reliability levels, our customers have come to expect. We continue to conduct in-depth operational modeling and planning to balance the availability in cost of both existing and new water supplies. It is clearly evident that new water supplies will be needed. In light of the big area and California’s continued growth, environmental restrictions and other stressors on California’s aging and inadequate water delivery systems. The quality of life for our customers and the economic vitality of Silicon Valley are inextricably linked to a reliable, high-quality and sustainable water supply. Rapidly increasing water supply costs will impact rates but at less than a penny per gallon, water service remains a great value. The time is right to advance local water supply solutions that ensure sustained reliability for our customers and the residence of Santa Clara County. To that end, we have sought permission from the California Public Utilities Commission to expand our recycled water system distribution network. Recycled water has been and will continue to be a critical water resource for the region. San Jose Water Company also continues to evaluate solutions and partnership opportunities that can fast track the expanded use of recycled water. Turning our attention to regulatory affairs, SJW received final decisions on key regulatory filings in both Texas and California in 2014. Almost three years after filing San Jose Water Company’s 2012 General Rate Case application seeking new rates for the years 2013 to 2015, the California Public Utilities Commission issued its final decision on August 14, 2014. Importantly, it approved new rates that reflect lower customer usage, higher water supply costs and the infrastructure investments we have made. Importantly, the decision also allowed San Jose Water Company to implement new rates retroactive to January 1, 2015. Since the decision was nearly two years late, San Jose Water Company has already filed its next General Rate Case with the commission for the three years 2016 through 2018. The filing sees rate increases of $34.9 million or 12.2% in 2016, $10 million or 3.1% in 2017 and $17.6 million or about 5.4% in 2018, respectively. It also requests the commission approval for capital budgets of $106 million, $114 million and $116 million for the years 2015 through 2017, respectively. Inclusive of the approved Montevina Water Treatment Plant improvements, the total capital investment for 2015 is anticipated to be approximately $130 million. These investments are critical to ensuring our customers continue to receive high quality and reliable water service. This is all the more important in the light of the water supply challenges now facing the region. We’re hopeful that our current filing will be processed on a timely basis for the benefit of customers and shareholders alike. The commission also improves San Jose Water Company’s request to delay its cost of capital filing until March 31, 2016. This cost of capital filing for San Jose Water Company is one part of the larger group of filings for all the other publicly traded water utilities, including California Water Service Company, Golden State Water Company and the California American Water Company. Since a change from currently adopted interest rates is unlikely due to the current economic environment, the one-year delay allows the utilities and the commission to defer potentially significant processing expenses. Also in 2014, the Public Utility Commission of Texas issued a decision on SJWTX’s 2013 general rate case application. The final decision settles all issues with the Coalition for Equitable Water Rates, the commission and the Office of Public Utility Counsel. The decision authorized the requested average system wide rate increase to be phased in annually, beginning January 1, 2015 to January 1, 2018 and provided that no refunds or credits will be owed to customers for rates that affect between December 2, 2013 and December 31, 2014. The New Year saw several changes at the California Public Utility Commission. Liane Randolph was appointed to the commission on December 23, 2014 and replaced outgoing Commissioner and President Michael Peevey. The Governor also named Commissioner, Michael Picker the commission’s new President. We welcome Ms. Randolph to the commission and President Picker to his new post and look forward to working with them, their collogues and commission staff to resolve the many water related issues facing California’s regulated water utilities. Finally in January 2015, the SJW’s Board authorized a 4% increase in SJW’s annual dividend to $0.78 per share. The dividend increase demonstrates a strong commitment to our shareholders and evidences the Board’s confidence in the company’s business plan. In summary, increasing cost for new water supplies, accelerated infrastructure needs and a rigorous regulatory and compliance environment will continue to present challenges to SJW and require us to refine and diligently execute our business strategy. The need to reorganize, reinvent and innovate in all aspects of our business has never been greater. SJW is committed to these principles and to working with stakeholders to deliver cost-effective solutions and safe and reliable water service. With that, I’d like to turn the call back to the operator for questions.