SJW's (SJW) CEO Richard Roth on Q2 2014 Results - Earnings Call Transcript

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SJW Corp. (NYSE:SJW) Q2 2014 Results Earnings Conference Call July 31, 2014 1:00 PM ET


Suzy Papazian - General Counsel

Richard Roth - Chairman, President and CEO

James Lynch - Chief Financial Officer

Palle Jensen - SVP of Regulatory Affairs


Ryan Connors - Janney Montgomery Scott


[Good day] ladies and gentlemen, and welcome to the Second Quarter 2014 SJW Corp. Earnings Conference Call. 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

Thanks, operator. Welcome to the second 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. 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, we refer you to the press release and to our most recent Forms 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 this presentation. As a reminder, this webcast will be available until October 27, 2014. You can access the release and the webcast at the corporate website,

I will now turn the call over to Rich.

Richard Roth

Thank you, Suzy. And 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.

After the closed business yesterday SJW issued its financial results press release. SJW’s second quarter results were significantly impacted by the regulatory lag associated with our 2012 general rate case filing and the draught in California.

However on July 11th, San Jose Water Company received a proposed decision on its 2012 general rate case application. Comments on the proposed decision are due to date and the financial decisions are not expected until later in the third quarter. Accordingly it is premature to comment on the outcomes of the rate case. When the final decision is rendered we will of course inform you.

We’re now hopefully that the regulatory delays had impacted San Jose Water Company results and operations for over a year and half will soon be behind us. Other results for the second quarter include continued robust organic growth in SJWTX our Texas water utility and consistent positive results from our fully leased portfolio of high quality real-estate investments in SJW Land Company. Jim Lynch will now discuss in more detail SJW’s 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

Thanks Rich. As noted our second quarter and year-to-date operating results reflect a negative impact of the delayed decision in our California 2013 general rate case and the ongoing draught in our California service area. In the second quarter we continued to operate in California under interim rate that except for increases due to pass through water expenses were essentially the same as those in effect at the end of 2012. While we now have a proposed general rate case decision the rate impact cannot be determined or recorded until the decision is finalized.

In addition, the second quarter was the first full quarter affected by the call for water conservation in California. In response, water usage for the quarter declined 11.4% compared to the second quarter of 2013. The usage decline as well as draught related water supply cost increases are reflected in our quarterly year-to-date results. Recall that effective March 31st, the company did establish both the conservation, water revenue adjustment mechanism and a modified cost balance in account to track the impact of conservation for future recovery.

In Texas [Technical Difficulty] partially mitigating the California draught impact. Net income for the quarter was $6.8 million or $0.34 per diluted share compared to $7.4 million or $0.37 per diluted share for the second quarter of 2013. The decrease in quarterly net income was primarily due to the impact of conservation in certain non-operating activities that I will discuss in greater detail.

For the year net income was $7.8 million or $0.38 diluted earnings per share compared to $8.8 million or $0.45 diluted earnings per share for the first half of 2013. Second quarter revenue was $70.4 million, a decrease of 5% over the second quarter of 2013. The decrease was primarily due to lower customer usage of 11%, partially offset by a 3% increase in water rates.

In addition, the contribution from our real-estate operations increased $600,000 due to new tenants at our Tennessee property with leases commenced in July 2013. Year-to-date, revenue was $125 million which is essentially flat when compared to the same period in 2013. Water production expenses for the quarter were $33.1 million, an increase of 2% over the second quarter of 2013. The increase was attributable to $2.7 million in higher per unit cost for purchased water and groundwater extraction partially offset by the usage decline in California. For the year, water production costs were $56.6 million or an increase of $5.8 million over the first six months of 2013. The increase was due to increased unit costs for purchased water and groundwater of $4.3 million and $3.4 million due to the decreased availability of surface water partially offset by $1.9 million in decreased usage.

Operating expenses, excluding production costs were $25.1 million in the second quarter which was essentially flat when compared to the second quarter of 2013. Higher depreciation and maintenance expenses during the quarter were offset by lower general and administrative expenses due to lower pension costs. Year-to-date, 2014 operating expenses were also consistent with 2013 due to the same factors noted in the quarter comparison.

For the second quarter and year-to-date, non-operating income and expenses including a $2 million gain on the sale of California Water Service Group and $273,000 gain on the sale of real estate investment in taxes. No similar sales occurred in the second quarter of 2013. The effective tax rate for the three and six months periods ended June 30th were 31% and 32% respectively compared to 41% for the same two periods in 2013. The 2014 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 $23 million in utility plant during the second quarter, bringing our year-to-date total to $48.2 million. As of June 30th, we completed 54% of our planned 2014 budgeted annual capital expenditures. In addition, for the second quarter and year-to-date we added 2.9 million and 4.5 million respectively in developer funded projects. As of June 30, 2014, our gross utility plant totaled $1.4 billion. Lastly on June 23, San Jose Water Company amended the credit agreement with Wells Fargo Bank to increase the maximum principal available for borrowing from 75 million to 85 million and extend the maturity date to September 1, 2016. In addition SJW Corp and SJW Land amended their credit agreement with Wells Fargo Bank to extend their maturity date September 1, 2016.

With that I will stop and turn the call back over to Rich.

Richard Roth

Thank you, Jim. While California and Texas remain mild in multiyear droughts, San Jose Water Company and SJWTX continue to provide safe and reliable water service. Both water systems benefit from the diverse supply of water resources that help ensure customer demand can be met during peak summer usage months. Despite limited surface supplies, San Jose Water Company was able to increase ground water production and to meet customer demand. While many Texas water systems have imposed restrictions on water usage, SJWTX has been able to meet the demands of existing customers and strong organic growth.

In addition to numerous ground water wells, SJWTX has two treatment plants located on the North and South shores of Canyon Lake. These two scalable treatment plants combined with long-term water supply contracts with the Guadalupe-Blanco River Authority put SJWTX in a solid water supply position.

Returning to the Californian water supply situation. In response to the prolonged drought in California, the State Water Resources Control Board adopted new emergency regulations requiring urban water systems to implement outdoor, residential water use restrictions. These restrictions became effective August 1, 2014. However San Jose Water Company observation rules which are generating near or those of the State Water Board have already been in effect since March 31, 2014 as ordered by the California Public Utilities Commission.

San Jose Water Company is currently working with the California Public Utilities Commission to ensure that the commission rules are in full harmony with the State Water Board emergency regulations.

As Jim mentioned, some of the water companies received approval on March 31, 2014 to implement a mandatory conservation revenue adjustment memorandum account that tracks losses in revenue due to reduce customer usage associated with the activation of our water conservation rules. Recovery of memorandum account balances will be implemented through a future filing with the commission.

As I stated earlier on July 11, 2014 the California Public Utilities Commission issued its proposed decision on San Jose Water Company 2012 General Rate Case application. It is important to remember that San Jose Water Company received permission to institute the interim rates effective January 1, 2013. The approval of interim rates will allow San Jose Water Company to recover incremental revenue retroactive to January 1, 2013 once a final decision is issued.

Although San Jose Water Company has not received its final decision on its 2012 General Rate Case application, preparations are well underway on San Jose Water Company’s 2016 General Rate Case filing.

We are hopeful that a final decision on San Jose Water Company's 2012 General Rate Case application is receive sufficiently in event of the 2015 filing. So that based on it in special conditions from this final 2012 decision may be incorporated into San Jose Water Company’s general rate case application schedule to be filed in January of 2015.

On May 23, 2014, San Jose Water Company filed an invoice that are seeking authorization to increase revenues by $9.4 million or approximately 3.6% to offset increases by the Santa Clara Valley Water District for groundwater production charges and treated water charges. The commission authorized this increase effective July 1, 2014. Also, effective July 28, 2014 we received authorization to place into rate the investments associated with the upgrade of our Montevina Water Treatment Plant which will incur during the 2013 calendar year. Effective September 1, 2014 the Public Utility Commission of Texas will formally assume authority and responsibility for the regulation of Texas investor owned water utilities. The Public Utility Commission of Texas has adopted the rules forms and procedures previously used by the Texas Commission of Environment Quality with minor modifications.

As investment in water company regulation transitions from the Texas commission on environment quality to the Public Utility Commission of Texas SJWTX continues to work with the Public Utility Commission staff and other investor-owned water utilities in an effort to ensure balanced and cost effective rules and procedures. SJWTX filed an appeal in Travis County District Court on November 14, 2013, regarding the Texas Commission on Environmental Quality ruling on our 2010 rate case. In June of 2014 the TCEQ completed the transfer of the rate case proceeding to the Travis County District Court. Proceeding has presented to the assigned judge a tentative case schedule which proposes hearings on the issues in February of 2015.

SJWTX’s rates, proposed rates for the city of Bulverde are now formally approved and in effect. As a result of the settlement reached with the city customers outside of Bulverde are subject to TCEQ jurisdiction for SJWTX are sizeable for Bulverde city limits proposed rates which are subject to refund became effective on December 2, 2013.

A preliminary hearing on the 2013 general rate case was conducted on July 22, 2014. At the hearing the administrative law judge allowed the involved parties until September 12 of 2014 to attempt to reach a settlement before formalizing the proceedings schedule.

The U.S. and California regulatory environments are undergoing important changes requiring SJW to quickly and effectively adapt to a host of additional and occasionally conflicting in uncertain regulations.

It is critical that SJW and its management team continued to adjust its business processes to embrace and efficiently implement new regulations for SJW to remain competitive and successful we must be nimble.

We are continuing to analyzing and refining our business processes to find the resources required to comply with tighten regulatory oversight while continuing to provide excellent water service at a reasonable price.

I believe SJW will be successful and prosper in the demanding and difficult business and regulatory environments. SJW remains well positioned to provide outstanding returns and to grow shareholder value. Our systems are efficient and in good condition. 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 Instructions). And your first question comes from the line of Ryan Connors with Janney Montgomery Scott. Please proceed.

Ryan Connors - Janney Montgomery Scott

Good morning, gentlemen. I guess good morning from your perspective. Good morning, good afternoon from our perspective here. I had a question first on the sales decline, volume declined. How does that volume, sales decline compare with projections that you had baked into your RAM filing earlier this year? Yes, this is Ryan Connors, did you get my question or no?

Palle Jensen

We did get your question; we were not sure whether our response was received. Did you hear anything from us?

Ryan Connors - Janney Montgomery Scott

It was not, it was a blank line on this side.

Palle Jensen


Ryan Connors - Janney Montgomery Scott

So, why don’t we start over there?

Palle Jensen

Okay. I got your question, Ryan. I assume you're referring to the RAM filing we filed for the temporary RAM in February. And in that there is more forecast to sales baked into. The way the RAM -- the temporary RAM works just like a regular RAM. And that is based on the measure, the metric, the sales metric is the authorized number for that particular period. And as you know, we’re still waiting to get that number authorized in our current rate case.

Ryan Connors - Janney Montgomery Scott

Okay. So I guess the issues that I am trying to drive at is what will be the scale and the RAM balance accruals relative to kind of expectations and whether the decline in usage post the sort of government usage restrictions, whether that’s been more significant, less significant or about in line with your expectation?

Palle Jensen

Well from an expectation standpoint, I think it’s about in line with our expectations. Unfortunately at this point, we are not able to quantify the RAM, the potential RAM balance because we don’t know the authorized base line number. As soon as we get a decision from current rate case, we will be able to quantify any revenue shortfall that we have measured in the temporary RAM mechanism.

Ryan Connors - Janney Montgomery Scott

Understood. Second question just has to do with you indicated that you are in a good position in terms of meeting your own demand, despite the drought conditions both in California and Texas. Do you have any opportunities to sell bulk water to other systems that are having supplier problems?

Richard Roth

Hey Ryan, this is Rich. Yes, we do a little bit certainly under PUC regulations in California, we can sell some mutuals and so forth that have water supply problems, we have a tariffs established for that. And I think we have done a little bit of that this year. It’s not significant to the net income of a company but it is there. Equally as well in Texas, we can do the same thing and we have more opportunity there because we have more control over our supplies. But in both jurisdictions Ryan, we have done that although to-date it’s not amounted to anything that would really impact the bottom-line.

Ryan Connors - Janney Montgomery Scott

Okay. Not really material. And then just the last question just over on the real-estate side, it looks like you sold the piece of property in Texas. Can we interpret that as suggesting the market is opening up and we could see a greater velocity of monetizations in the real-estate side or would that be stretch?

James Lynch

I think that’s a scratch Ryan. I think what we view as we take a look at our real-estate properties and we consider the duration of the leases and where the properties are located as well as our future cash flow needs to determine whether or not it’s a good time to liquidate properties. Over the past year and half, we’ve liquidated three properties from the portfolio based on that criteria.

Ryan Connors - Janney Montgomery Scott

Okay. Great, well thanks for your time.

James Lynch

Thanks Ryan.

Richard Roth

Thank you.


(Operator Instructions). And your next question comes from the line of Michael (inaudible) Blaine Capital. Please proceed.

Unidentified Analyst

Good morning everyone.

Richard Roth

Hey Michael.

James Lynch

Good morning.

Unidentified Analyst

Rich you’ve kind of alluded something earlier in your comments that I hadn’t really thought about before and that was I am not sure if the correct phrase is, the necessity of having the 2012 GRC wrapped up for baseline purposes for the 2015 GRC which gets me thinking, can you actually file the ‘15 without the ‘12 been closed?

Palle Jensen

This is Palle here. Actually we are required to file under California law. So in the absence of a specific order from the commission not to file, we will file on schedule the 2015 filing. It is our expectation though that we will have solution of the 2012 Rate Case well in advance of the 2015 filing.

Unidentified Analyst

Okay. That’s all I had. Thank you.

Richard Roth

Thank you, Michael.


At this time, gentlemen we have no further questions.

Richard Roth

Okay. Well thanks everyone for tuning in and listening to us. We’ll be back with you at the end of the third quarter and hopefully have some more information for you at that time. Thank you very much.


Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. And have a great day.

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