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Executives

Suzy Papazian - Secretary and Secretary of San Jose Water Company

W. Richard Roth - Chairman, Chief Executive Officer, President, Member of Real Estate Committee, Chief Executive Officer of San Jose Water Company, Chief Executive Officer of Sjw Land Company, Chief Executive Officer of Sjwtx Water Inc, President of San Jose Water Company, President of Sjw Land Company, President of Sjwtx Water Inc, Director of Sjw Land Company and Director of San Jose Water Company

James Patrick Lynch - Chief Financial Officer and Treasurer

Palle L. Jensen - Senior Vice President of Regulatory Affairs - San Jose Water Company

Analysts

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

SJW (SJW) Q1 2013 Earnings Call April 25, 2013 1:00 PM ET

Operator

Good day, ladies and gentlemen. Welcome to the SJW Corp. First Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I'd now like to turn the conference over to your host for today, Ms. Suzy Papazian, Corporate Secretary. Please proceed.

Suzy Papazian

Thank you, operator. Welcome to the First Quarter 2013 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. The statements are only projection and actual results may differ materially. For discussion of the factors that could cause actual results to be different from the statements and 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 these statements. You'll have the opportunity to ask questions at the end of the presentation. As a reminder, this broadcast will be available until July 29, 2013. You can access to release and the webcast at the corporate website www.sjwcorp.com.

I will now turn the call over to Rich.

W. Richard Roth

Thank you, Suzy. Welcome, everyone. Thank you for joining us. I'm 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 for San Jose Water Company.

As Jim will discuss in greater detail later, SJW's net income for the first quarter of 2013 increased compared to the same period in 2012. In both California and Texas, final decisions on our general rate case remain outstanding amid increasingly challenging regulatory and political environments. We also have better insight into the water supply picture [ph] for the remainder of the year, which although adequate, does not appear as plentiful as in past years.

With those brief introductory remarks, Jim will now provide you with a detailed review and analysis of Q1 results and other financial commentary. After Jim's remarks, I will provide additional information on our regulatory filings, water supplies and offer my perspective on key operational and business matters. Jim?

James Patrick Lynch

Thanks, Rich, and thank you to our listeners for joining us today on our call. Our first quarter operating results were influenced by cool, dry temperatures in our northern California service area when compared to the warm weather we experienced in the first quarter of 2012. Because of this, despite our dry winter, we experienced a decline in usage of 7% in the first quarter when compared to 2012.

In our Texas service area, drought conditions returned this quarter resulting in a nominal increase in usage compared to 2012 when winter rains brought drought relief. Our first quarter operating results also benefited from the recognition of certain balancing accounts totaling approximately $1.8 million, which we determined to be probable of recovery in the future. Rate increases and increases in the number of customers during the quarter were not significant. On the plus side, the heavy rains we experienced in Northern California in the fourth quarter of 2012 resulted in an increase in our supply of surface water. In the first quarter of 2013, our surface water production was 1.2 billion gallons or 15% of total water production compared to 349 million gallons or 4% of our total water production in the first quarter of 2012. As of March 31, 2013, we have 1 billion gallons of additional available surface water in storage for use during the remainder of the year. This is before any future supply increases that could result from additional precipitation during the year.

Revenue for the quarter was $50.1 million compared to $51.1 million for the first quarter of 2012. The $1 million decrease included a $3.3 million decrease due to lower customer demand, offset by $1.8 million increase due to recorded balancing accounts and $490,000 due to rate increases in new customers.

Water production cost for the quarter were $18.3 million, a decrease of $1.8 million over the first quarter of 2012. The decrease included $1.9 million due to the availability and use of lower-cost surface water and $841,000 due to lower customer demand, offset by higher ground and import water unit cost of $944,000.

Operating expenses, excluding water production cost were $26.1 million in the quarter compared to $24.3 million in the first quarter of 2012. The $1.8 million increase consisted of $946,000 in increased administrative and general costs, of which $937,000 related to nonrecurring settlement payments and a bonus payment incurred in connection with securing permits for our Texas water supply project. Absent these costs, we maintained administrative and general costs at Q1 2012 levels. Depreciation expense and property and other non-income taxes together increased $622,000 due to new utility plant assets placed in service, and maintenance expense increased $211,000.

Nonoperating income and expenses included a $1.1 million gain on sale of a real estate investment in Connecticut which closed in February 2013. Net income for the quarter was $1.3 million or $0.07 diluted earnings per share compared to $1.1 million or $0.06 diluted earnings per share for the first quarter of 2012.

As discussed during our call last quarter, effective January 1, 2013, we adopted interim rates which were set equal to our fiscal 2012 year end rates, until a decision is reached by the California Public Utilities Commission on our 2013 rate case.

Today, a decision has not been reached and interim rates remain in effect. We will be allowed to recover the difference between interim rates and approved rates retroactive back to January 1, 2013 after a final decision is reached. Rich will provide a further update on the pending California rate case in a few moments.

On April 3, we completed a follow-on public offering of 1,321,000 shares of our common stock at a price of $26.50 per share, raising gross proceeds of approximately $35 million. In connection with the offering, we granted our underwriters a 30-day option to purchase up to 198,150 additional common stock shares to cover over allotments, if any. We will use the net proceeds generated from the offering to finance capital expenditures, repay short-term debt and for other general corporate purposes. During 2013, we plan to invest between $90 million and $100 million on new capital assets and infrastructure replacements, exclusive of the planned retrofit of our Montevina Water Treatment Plant. Expenditures for the plant in 2013 are estimated at $3 million. Our 2013 capital expenditures are subject to regulatory approval.

And with that, I'd like to turn the call back over to Rich.

W. Richard Roth

Thank you, Jim. As we have discussed in previous calls, SJW has several important regulatory filings still pending. The processing of regulatory filings at the California Public Utilities Commission is extending well beyond the formal timetable adopted by the Commission for processing of general rate case filings.

The delays have affected nearly all utilities, as the Commission response to criticism regarding safety and security and other issues by repeatedly examining every aspect of each filing in great detail. Nearly all recently filed general rate cases have extended beyond the established processing timelines as a result of this enhanced regulatory oversight. A review of the condensed timeline of San Jose Water Company's general rate case now pending before the commission may help our listeners understand where we are in the process and how we got there. You will recall that San Jose Water Company's pending general rate case was filed in early January 2012 to establish rates for the years 2013 to 2015. The completion of hearings and filing of testimony concluded in the summer of 2012 and the case was remanded to the administrative law judge. On January 29, 2013, prior to the rendering of a proposed decision, the administrative law judge reopened a general rate case for the purpose of receiving and evaluating new information regarding safety and security issues. Reopening a general rate case after all the hearings and filed testimony has been completed for several months is unusual, but we recognize that the Commission is seeking to ensure adequate review of safety and security matters following the PG&E San Bruno incident. A prehearing conference regarding safety and security issues was held in February. On February 27, San Jose Water Company issued the requested report on safety and security and on April 22, a hearing on the issues was concluded. Unfortunately, procedural issues and the reopening of the general rate case have delayed a decision on the company's general rate case. We are, at this time, unable to accurately estimate when a general rate case decision will be rendered. It is important to reiterate that San Jose Water Company filed for and received commission approval to institute interim rates effective January 1, 2013, that will, among other things, allow the company to implement rates retroactively when a final decision is issued. Additionally, after more than 2.5 years of prehearing conferences, evidentiary hearings, filed testimony and negotiations, San Jose Water Company reached a settlement with the Division of Ratepayer Advocates regarding upgrades to its Montevina Water Treatment Plant. The key terms of the settlement are that the recorded cost of the project will be included in rate base through the filing of annual advice letters, so the project costs are limited to be $62 million. However, San Jose Water Company may request additional funding if the project costs exceed the $62 million cap. The settlement was submitted for the Commission's consideration on March 6 and a decision is expected in the second quarter of 2013.

In Texas, SJWTX received a proposal for a decision on its general rate case application filed in October of 2010. The interim 38% rate increase effective since October 27, 2010, will remain in effect subject to refund until a final order is issued which we anticipate in the second quarter of 2013. We are working with commission staff on remaining outstanding issues, including finalizing revenue requirements and tariffs. Because it is taken an excess of 2 years to complete the 2010 general rate case filing, SJWTX expects to file a general rate case in the second quarter of 2013 to reflect one, additional investment in the system since the last filing; two, increase cost of service since the last filing; and three, a systemwide uniform rate structure. We believe a systemwide uniform rate structure is appropriate because SJWTX's water system is interconnected and defined by its subsidiary service areas.

Now, turning our attention to water supplies, in California, following one of the driest winters on record, rainfall in San Jose, California is at 74% of normal. Sierra Nevada snowpack is at 52% of normal. Storage and local reservoirs is approximately 64% of normal. And San Jose Water Company's primary surface water reservoir, Lake Elsman, is at approximately 75% of normal.

Overall, San Jose Water Company's 2013 water supply outlook is adequate to meet demand because of its better sources of supply. Our groundwater basin, which is replenished by natural and artificial recharge, remains their capacity and allocations from the state and federal water projects are 35% and 70% of requested amounts, respectively.

In Texas, the drought continues to impact Central Texas and the Hill countries served by SJWTX. Absent significant precipitation in the coming months, we anticipate Stage 1 drought restrictions will be instituted to summer. However, because of SJWTX robust portfolio of water supplies, its operations are relatively drought-tolerant and we do not expect the restrictions will significantly impact our Texas customers or operations. While the regulatory climate remains unpredictable, SJW's fundamentals remain strong. We prudently invest capital to maintain our systems, we employ efficient and sustainable business processes and we provide exceptional customer service. Additionally, SJW's regional business models facilitates efficient design, construction, maintenance and operation of its water systems to provide excellent service and reasonable rates for our customers and attractive long-term returns for our shareholders. We are confident over the long haul that our investments will contribute to lasting growth and profitability, earnings and dividends to our shareholders.

With that, I will return the call back to the operator.

Question-and-Answer Session

Operator

[Operator Instructions] You have a question from the line of Heike Doerr with Baird.

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

Two questions. One, on the pending rate case in California, procedurally, what's our next step?

Palle L. Jensen

That next -- Heike, this is Palle. The next step is filing of briefs, they're due 2 weeks from the hearing. So that's -- I think it's about May 5. And that's only related to the safety and security issues. And then we will expect proposed decision from the ALJ at some point after that.

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

There's no procedural date stated for when we can expect that proposed decision?

Palle L. Jensen

No. Unfortunately, we'd be on the timeline at this point. So all the evidence has been placed on the record and the proceeding has been concluded. So a proposed decision can come -- could be expected at any time from ALJ.

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

Should this matter delay and we're seeing in September perhaps that a proposed decision still hasn't been authorized, is there any action that the company can take to prompt the Commission to act?

Palle L. Jensen

There is no procedural way that we can move the proceeding along. We have pleaded with the Commission that we believe that a proposed decision should be forthcoming as soon as possible. We've had that pleading with the ALJ and the Commission is aware of our concern.

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

Okay. And once -- we would have to wait until a final decision is issued before we would see that come into the income statement and then it would be retroactive back to January 1. Jim, could you maybe talk us through how that works in the income statement?

James Patrick Lynch

That's right, Heike. We do need to see, because we have requested a RAM. If in fact we if we get the RAM what the implementation would be of that relative to retroactive rates. But at this point, we believe that any income that we have foregone relative to going back to January 1, we would be able to record at the time the decision is rendered.

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

But when we say at the time of the decision, do you mean the time of the final decision or could you act already, once there's a proposed decision?

James Patrick Lynch

No. It would be at the time of the final decision.

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

And then switching gears. I wondered if you could talk to us, maybe remind us, what the purchased water costs were like in the second quarter last year? What your supply mix is like as we think about what the next quarter's going to be, given the kind of weather climate that you guys have been having?

James Patrick Lynch

Are you talking about our Q1, comparable Q1 to Q1?

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

No. I'm thinking as we model out what second quarter is going to be, if you could refresh our memory what your supply situation was and what the purchased water costs were in the second quarter of last year?

James Patrick Lynch

I would have to circle back with you on that, Heike. I don't have that information for Q2.

Operator

[Operator Instructions] Looks like we have no other questions today. So I'll go ahead and turn the call back over to Mr. Rich Roth for some closing remarks.

W. Richard Roth

Thank you. Like all of you, I wish we could accelerate the regulatory process but as Palle has explained, that is something we can't really do other than work -- than do everything we can do to provide the commission with the information they need to process our filing. We are committed to making our communications not only with the commission but with the general public and core competency for the company so as to better communicate issues, the value of water and our commitment to providing excellent service. With that, I look forward to talking to you at the end of the second quarter.

Operator

Ladies and gentlemen, that will conclude our earnings call today. Thank you very much for joining us and you may now disconnect. Have a great day, everyone.

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