SJW's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 2.13 | About: SJW Corp. (SJW)


Q2 2013 Earnings Conference Call

August 01, 2013 01:00 pm ET


Suzy Papazian – Secretary and Head-Investor Relations

W. Richard Roth – Chairman, President and Chief Executive Officer

James P. Lynch – Chief Financial Officer

Palle L. Jensen – Senior Vice President-Regulatory Affairs


Heike M. Doerr – Robert W. Baird & Co., Inc.


Good day, ladies and gentlemen, and welcome to the SJW Corp. Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today, Ms. Suzy Papazian. Please proceed, ma’am.

Suzy Papazian

Thanks, operator. Welcome to the second 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 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, 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 October 28, 2013, and you can access the release and the webcast at the corporate website

I will now turn the call over to Rich.

W. 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 Palle Jensen, our Senior Vice President of Regulatory Affairs.

As Jim will discuss in greater detail later in today’s call, SJW delivered solid second results. We have been able to increase both revenue and net income quarter-over-quarter and year-over-year, compared to 2012 despite continuing uncertainty with both our Texas and California rate case filings and the challenges resulting from below average precipitation in both locations.

This is important because while the regulatory lag in California and Texas is impacting SJW results, we continue to find ways to effectively operate the company while our economic regulators process our rate cases. SJW as plenty of company has significant delays in GRC processing in both California and Texas seem to have become the not.

I will now turn the call over to Jim to provide you with a detailed review and analysis of the Q2 results and other financial commentary. After Jim's remarks, I will provide additional information on our regulatory filings and other key operational and business strategy. Jim?

James P. Lynch

Thank you, Rich and thank you to our listeners who are joining us today on the call. Our 2013 second quarter and year-to-date results reflect an increase in revenue due to an overall increase in customer demands and higher rates as compared to 2012. The increase in customer demand was mostly attributable to warm, dry weather in our California service area.

The higher rates were primarily the result of a rate increase in California due to higher water cost imposed by the Santa Clara Valley Water District, our wholesale water supplier. As you recall, in July 2012, the Water District implemented a 9% increase in the wholesale cost of water.

Wholesale water cost increases are passed on to our customers through higher rates on a cost recovery basis. Approximately 30% of the revenue increase this quarter was due to recovery of these costs. On a side note, the July 2012 rate increase by the District, which was the second consecutive annual increase was followed by another 9% increase effective July 1 of this year.

Our second quarter and year-to-date results also benefited from the recognition of certain balances subject to balancing the memorandum account which we determined to be probable of recovery in the future.

Our water production for the quarter was impacted by a reduction in available surface waters due to one of the driest winter and spring seasons on record in Northern California. However, as a result of significant rainfall at the end of 2012, surface water production year-to-date was up 39% over the prior year.

Our available stored surface water at the end of the second quarter suited approximately 759 million gallons compared to approximately 800 million gallons at June 30, 2012. With our available surface water supply, committed water from wholesalers in both California and Texas, and available groundwater, we will have adequate supplies to meet anticipated customer demands for the remainder of the year.

Net income for the quarter was $7.4 million or $0.37 diluted earnings per share compared to $5.2 million or $0.28 diluted earnings per share for the second quarter of 2012. Revenue was $74.2 million compared to $65.6 million during the second quarter of 2012. The $8.6 billion increase included $5.4 million due to higher customer demand, $2.2 million due to rate increases, balances subject to balancing and memorandum accounts totaling $730,000 and $305,000 related to new customers and the lease revenue from real estate operations.

Water production cost for the quarter was $32.5 million, an increase of $5.1 million over the second quarter of 2012. The increase was primarily attributable to higher usage and increased unit cost for purchase water and groundwater charges by the Water District in California. The change also reflects the lower use of company owned surface water, which resulted in an increase of approximately $912,000 in water production cost.

Operating expenses excluding water production cost were almost flat at $24.8 million compared to $24.6 million in the second quarter of 2012. The $200,000 increase consisted of $300,000 in higher maintenance expenses due to an increase in system leak repair activity and increased percentage of depreciation and amortization, and taxes other than income taxes of $417,000 and $115,000 respectively related to new utility plant assets placed in service. These cost increases were partially offset by $660,000 decrease in administrative and general expenses due to reduced spending on our recycled water retrofit program.

Turning now to year-to-date results, net income was $8.8 million or $0.45 diluted earnings per share compared to $6.3 million or $0.34 diluted earnings per share for the first half of 2012. Operating revenue increased to $124.1 million from $116.7 million. The $7.6 million increase included $2 million due to higher customer demand, cumulative rate increases of $2.5 million, balances subject to balancing of memorizing accounts totaling $2.6 million and $537,000 from new customers and new lease revenue from real estate operations.

Water production costs in the first six months were $50.8 million, an increase of $3.3 million over the first six months of 2012. The increase was due to higher usage and increased unit costs for purchasing groundwater. These increases were partially offset by a savings of approximately $1 million resulting from the use of more available surface water.

Operating expenses excluding water production costs were $50.9 million year-to-date compared to $48.9 million in the first half of 2012. The $2 million increase consisted of $285,000 in higher administrative and general expenses due to bonuses and other cost associated with acquiring water permits in Texas. $511,000 in higher maintenance expenses due to an increase in system leak repair activity and increases in depreciation and amortization, and taxes other than income taxes of $925,000 and $229,000 respectively related to new utility plant assets placed in service.

Non-operating income and expenses included a $1.1 million gain on sale of a real estate investment in Connecticut, which closed in February of 2013.

As discussed during our last call, 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 shares of common stock to cover over-allotments.

On April 25, the underwriters exercised the over-allotment option to purchase 100,000 shares, raising an additional $2.6 million in gross proceeds. We are using the operating proceeds to finance capital expenditures, repay short-term debt and for other general corporate purposes. Through the first six months of 2013, we completed approximately $42 million of utility plant or 45% of our plant, $92.5 million 2013 capital expenditures budget.

In addition, we added another $24.9 million in construction work in progress. The total gross utility plant in operation at the end of the second quarter worth $1.26 billion compared to $1.22 billion at the end of the second quarter of 2012.

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

W. Richard Roth

Thank you, Jim. As most of our listeners know, the California Public Utilities Commission is under intense scrutiny as a result from the political customer and media fallout from PG and the San Bruno disaster, and because of this, nearly all significant CPUC filings are experiencing major delays. Although San Jose Water Company’s rate case is still pending, we filed for and received approval to institute interim rates affective January 1, 2013.

Among other things, interim rates allow the companies to implement new rates retroactively when the final decision is issued. In spite of the delay, San Jose Water Company is managing the challenges associated with operating new large water utility without direction from the GRC decision.

As previously mentioned, this is a common theme for nearly every California utility, as significant delays have become the rigor after CPUC. California GRC delay notwithstanding San Jose Water Company’s settlement with a Division of Ratepayer Advocates for upgrades to it’s Montevina Water Treatment Plant facility finally received regulatory approval in July after nearly three years of CPUC review and analysis.

The key terms of the decisions which are also included in a recently filed 8K provide for: one, total project cost not to exceed $62 million which is treated as an advice letter cap for ratemaking purposes; two, recorded cost to be included in rate base through annual advice letter filings; and, three, an opportunity to request additional funding in a future general rate case or in a separate application if the cost of constructions for the for the Montevina upgrade project should exceed the $62 million cap.

We are hopeful that this decision is indicative of a generally constructive regulatory environment and with the final decision in hands, preparations are already well underway to move the project forward.

In Texas, we received a supplemental proposal for decision or PFD on our 2010 rate case filing. This supplemental PFD was issued on June 6 in response to the March 27 PFD that was remanded back to the administrative law judge for reconsideration of certain issues. We expect the matter to be placed on the Commissioners’ agenda for a final ruling, sometime in the third quarter. Since we have been nearly 3 years since the GRC application was filed, SJWTX expects to file a new DRC application as soon as the TCEQ issues a final decision on the current filing.

On May 23, San Jose Water Company filed for authorization from the California Public Utilities Commission to increase revenues by $8.1 million or approximately 3.2% to offset a roughly 10% increase instituted by the Santa Clara Valley Water District for groundwater production and treated water charges. The commission subsequently approved this increase which became effective on July 1, 2013 concurrent with the district to increase.

In regards to SJW Land Company, we are pleased to report that with the completion of tenant improvements, our Knoxville, Tennessee properties are now completely leased with high quality tenants. Given the significant regulatory delays SJW is experiencing, I believe it’s worthwhile to provide our perspective on the current economic environment, political landscape and regulatory plans and how those relate to SJW’s prospects.

The U.S. economic recovery (inaudible) at best with a large number of households experiencing manifest reductions in the cumulative wealth over the last five years. Many of those households have not fully recovered from the recent structural economic changes which exacerbated the uncertainty and anxiety of many Americans as they struggled with increasing cost and tepid growth in disposable income.

Elected officials and regulators are sensitive to this and are doing their best to balance challenging and often conflicting sets of objectives. A great deal of capital must be deployed to replace aging water infrastructure, secure new sustainable water supplies, deal with environmental issues, comply with urging water quality regulations and at the same time keep our cost of water service as low as possible. This is no smaller easy task.

At SJW, we believe more panning must be done to clearly communicate why the cost of water service is rising. What efforts we are undertaking to slow the rate of increase and what we are doing is in the customer’s best interest. Consequently effective customer and stakeholder communications on the value of water must become one of our top priorities and core competencies.

To that end, SJW has initiated formal outrage in communication programs to provide customer stakeholders and decision-makers with the information on the cost and value of water service. These programs are long-term investments that will yield results only if the communications are on point as expected. And we are able to demonstrate that we are doing everything reasonable and practical to keep rates as low as possible.

Additionally, SJW continues to seek ways to improve our financial performance and operate efficiency. Specifically we are realizing efficiencies by driving technology resources and responsibility deep into the workforce so that every employee is performing at the highest level, while also eliminating labor-intensive activities that have little or no impact on operating results.

In spite of the challenging regulatory, political and economic environments, we remain optimistic at the prospects of including our standing rate case filings in California and Texas in 2013 and will continue to make prudent investments in our water system to deliver exceptional service. We believe that these investments are intelligent, well planned and enduring. Over the long haul they should contribute to sustained growth, and profitability, earnings and dividends for our shareholders. Thank you all for you continued interest and investment in SJW.

With that, I will turn the call back to the operator for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Heike Doerr of Robert W. Baird. Please proceed.

Heike M. Doerr – Robert W. Baird & Co., Inc.

Good morning everyone.

W. Richard Roth

Good morning.

James P. Lynch

Good morning Heike.

Heike M. Doerr – Robert W. Baird & Co., Inc.

I wonder if we could talk a little bit about Texas. What specifically is going up this rate case?

James P. Lynch

Say again.

Heike M. Doerr – Robert W. Baird & Co., Inc.

What’s making this rate case take so long? Is it similar to California were things just take longer than they should or is there a specific item that’s more contentious than normal?

Palle L. Jensen

Hi, Palle here. It’s usually the process and taxes is fairly simpler administrative process, but in this particular case, the full case was litigated due to customer protests in response to our rate case filing.

We have also had several rounds of comments on the proposed decision. So that has created the issue of delays. But you got to remember that under the TCEQ regulation in Texas, we actually implemented rates back in 2010, 60 days after our initial filing. So it’s a little different than you see here in California. But the process has been pretty involved in this particular case. It is especially because we requested a rate base determination which is pretty involved. That means that the TCEQ basically audits all your utility plant in service and as you recall, we have had significant investments in Texas since we acquired the system in 2006. So that’s a pretty involved process. It’s also very beneficial for us in the sense that we’re going to be one of the only utilities in Texas that’s going to actually have an established rate base that has been determined by the TCEQ once we’re out of this process.

Heike M. Doerr – Robert W. Baird & Co., Inc.

And then how should we think about the next rate case filing. I know that regulation of what utilities is going to move from the TCEQ to the PUC. If you started under the TCEQ, will they complete it or is this next rate case have the risk of getting lost between the commission shuffled.

W. Richard Roth

The idea with the legislation it is that the move to the PUC is actually not going to take place under the PUC regulation. It’s not going to take place until rate case is filed after September of 2014. So our filing that we anticipate to file this year in Texas once we get a decision will be filed under the TCEQ existing rules. There is a caveat that we are in the legislation and that is the public utility council at the PUC can participate as an intervener in the proceeding. They are allowed to do that once we file. I don’t anticipate that to be a big issue though because it’s just that they would take the place of the customary customer intervention in the rate case. So I don’t see any additional issues in our next filing coming up, since the regulation won’t be implemented until September 2014.

Heike M. Doerr – Robert W. Baird & Co., Inc.



At this time, there are no additional questions in the audio queue, and I’d like to turn the call back over to management for closing. Please proceed.

W. Richard Roth

Okay. Thank you everyone. Thanks for listening in and we’ll see you at the end of the third quarter. Thanks.


Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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