SJW Group (SJW) on Q1 2021 Results - Earnings Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the SJW Group Q1 2021 Financial Results Conference call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. James Lynch. Sir, please go ahead. James Lynch: Thank you, operator. Welcome to the First Quarter 2021 Financial Results Conference Call for SJW Group. I will be presenting today with Eric Thornburg, Chairman of the Board, President and Chief Executive Officer; and Andy Gere, President and Chief Operating Officer of San Jose Water Company. Eric Thornburg: Thank you, Jim. Welcome, everyone, and thank you for joining us. I am Eric Thornburg, and it is my honor to serve as Chairman, President and CEO of SJW Group. We're now more than 13 months into the COVID-19 pandemic. I would again like to thank our employees and the nation's other essential workers for their efforts over the past year to serve customers, communities and each other during the pandemic. There is a sense of cautious optimism that the worst is behind us, and we have begun planning for the safe return to our offices and work centers. Over the past year, we've learned much about our teams, our culture, how we can adapt and what we can achieve through remote work. Despite the challenges, our people have personified our mission, trusted professionals passionate about delivering life-sustaining, high-quality water and exceptional service to families and communities while protecting the environment and providing a fair return to shareholders. Looking ahead, we are preparing for a phased return to our offices and work sites, building on our established risk-based process that has served us well during the past year. We will adhere to the safety guidelines provided by our national, state and local health authorities. Our goal remains the same as it has been throughout the pandemic to deliver on our public health mission as a water service provider and protect our employees, customers and communities. I and the rest of our executive leadership team are looking forward to the day when we can express our appreciation to all employees in-person and meet the new employees, who have joined our team over the past year without having set foot in our offices. We are committed to a safe return that seizes the benefits of remote work while providing a safe physical environment to nurture collaboration and our culture. Andy Gere: Thank you, Eric. A very low precipitation that we have experienced in the Santa Cruz Mountains this winter has had a significant impact on our local surface water operations, both in terms of storm runoff collected at the creek intakes for immediate treatment as well as the volume of water that we've been able to impound in our Lake Elsman reservoir for release later in the year. For the first time in my 25 years at San Jose Water, we are temporarily taking our Montevina Water Treatment Plant offline due to low supply. We will bring the plant back into service when hydrologic conditions allow. To provide some perspective, the chart on Slide 10 shows the historic surface water production in blue compared with the associated rainfall at Lake Elsman in red over the same period. As you can see, there's been just one other year, 2014, where we saw such low levels of rainfall and surface water production. Fortunately, the regional water supply picture is somewhat better, and despite the low rainfall and snowpack this winter, the total groundwater storage at the end of the first quarter remained at Stage 1 or normal of Valley Water's water shortage contingency plan. Based on available recharge and the current rate of withdrawal. Valley Water reports that it is forecasting to remain in the normal range through year-end by supplementing normal supplies with additional imported water. Eric Thornburg: Thank you, Andy. As a result of the water supply situation in California, we anticipate increases in our operating costs through the reliance on purchase water from our wholesaler to meet our customers' needs in 2021. Currently, every billion gallons of purchased water has an incremental cost to the company of $4.2 million more than using our own supply sources. As a direct result of the water supply outlook and in full transparency, we are announcing guidance of $1.85 to $2.05 per diluted share in 2021. This assumes no additional company produced surface water in California for the remainder of 2021. We are in the process of updating our strategic water supply plan to evaluate current and future supply reliability and resiliency. Our current California general rate case proceeding will address the impact of surface water availability. The prudent management of our business and financial resources continues to be fundamental to our growth and our ability to return capital to shareholders. We are proud to have continuously paid a dividend for over 77 years and to have increased the annual dividend in each of the last 53 years, delivering value to our shareholders. I will now turn the call over to Jim, who will review our first quarter financial results. After Jim's remarks, I will address regulatory and other business matters. Jim? James Lynch: Thank you, Eric. Our first quarter operating results reflect new revenues authorized by our 2019 California general rate case. Water infrastructure conservation adjustment and water infrastructure surcharges authorized in Connecticut and Maine and customer growth in Texas. These increases were offset by a decrease in customer usage, the impact of a February ice storm in Texas and a decrease in available low-cost surface water due to the dry weather conditions in California that Eric and Andy just discussed. First quarter revenue was $114.8 million, a 1% increase over the first quarter of 2020. Net income for the quarter was $2.6 million or $0.09 per diluted share, an 8% increase over net income of $2.4 million or $0.08 per diluted share reported in the first quarter of 2020. The increase in diluted earnings per share for the quarter was primarily attributable to cumulative rate increases of $0.08 per share, cumulative cost savings of $0.04 per share, a tax benefit of $0.04 per share and an increase in nonregulated income of $0.03 per share. Eric Thornburg: Thank you, Jim. SJW Group continues to execute on our core growth strategy of investing in high-quality water systems to provide safe and reliable water service to customers and communities and earning a fair return on those investments. As Jim just mentioned, we have already invested approximately 20% of our planned 2021 capital spending through the end of the first quarter. We have high-quality water systems throughout our service areas and are investing to sustain them for the benefit of customers, communities and shareholders. Other regulatory developments in the first quarter include the filing of general rate cases for both San Jose Water and Connecticut Water in January. San Jose Water's GRC application proposes a $435 million capital program for the years 2021 through 2023, supported by our award-winning enterprise asset management system. New rates are expected to be effective in the first quarter of 2022. California employs a future test year, and thus, the level of capital spend is authorized during each general rate case cycle. Connecticut, Texas and Maine, employ a historical test year, where capital investments not otherwise recoverable through surcharge mechanisms and expenses are recovered in subsequent general rate case filings after they have been incurred. Connecticut Water's general rate case is the first since their last decision in 2010. A primary driver of the case is the $266 million in infrastructure investments that have been completed and are providing a benefit to customers, but are not yet covered in rates. The Connecticut Public Utilities Regulatory Authority, or PURA, is expected to issue a decision in the third quarter. Operator: Our first question comes from the line of Richard Sunderland with JPMorgan. Richard Sunderland: Turning to the California GRC. Just curious if you could speak more to the guardrails on the supply in rates, thinking about kind of the range of outcomes possible. Is this something we should think about in terms of resetting supply mix to more recent trends? Or are there other ways to address the volatility and recent low supply that you've been realizing? Eric Thornburg: Yes. Thank you, Richard. I'll start, and then I'll see if my colleagues have anything to add. Richard, really, the timing is ideal from that standpoint. Obviously, we are just about to start our -- the actual hearings in our California general rate case. And with the experience of the last 2 years, it will be very compelling evidence to support our proposal to reduce the mix of company-owned surface water supply in our overall cost structure. So we have put together, I think, a very dynamic presentation for the commission and the public advocate staff to review. It shows a significant decrease in the surface water -- company-owned surface water benefit within the rate design, and so we'll have to get into hearings and support that. But clearly, the last 2 years provide real-time evidence that a reduction in that mix is called for. So -- and of course, with the state's overall situation, where 95% of the state is in anywhere from a moderate to an extreme drought condition, I think it provides further support for making that adjustment. Conversely, I'm really pleased with the balance of our supply situation. The groundwater table is strong, and there is no indication there that we would need to ask for mandatory considerations. So we have the water, but just in our purchased water and our well portfolio -- groundwater supply portfolio. Andy or Jim, anything to add to that? Andy Gere: I think the only thing I would -- excuse me, go ahead, Jim. James Lynch: No, go ahead, Andy. Andy Gere: The only thing I would add is, when we see a return to wetter weather with our upgraded treatment plant, we're poised to capture sort of a larger fraction of what hits the ground because of our advanced treatment capability. So we think, in the long run, that investment is going to pay off, but right now, we're working towards those lower forecasts. James Lynch: And then lastly, Richard, the only thing I would say is that we are also about to begin the process for our cost of capital proceeding. And certainly, in our request for our authorized ROE, we have highlighted the incremental risk that the element of surface water has within our surface water supply. Richard Sunderland: Great. I appreciate the color there. Just actually following up real quick on the cost of capital point. So this sort of volatility from supply is -- gets inherent in the rate structure, and as you pointed out, is something you intend to highlight within the parameters of cost of capital. Do you have any sense on how that has played out in prior cost of capital proceedings, particularly the last round versus making the argument now is certainly, the recent history has highlighted this more so over the past 2 years. So it seems front of mind, but just curious if you can provide any high-level color on prior conversations here. Eric Thornburg: Yes, I'd be happy to do that. Jim, why don't you start, and then I'll supplement your answer there. James Lynch: Perfect. So Richard, what's kind of interesting is, if you take a look at the cost of the water supply, the cost to replace the surface water. It's gone up significantly over the past 5 to 10 years. And it's only been in the recent 4 or 5-year period where we've seen some significant variations in terms of the cost of our water supply as a result of that and the precipitation variances that we've seen coming out of the watershed. So it's really come to the forefront now. We've not included water supply in the past, to my knowledge, as an influencer, if you will, on our requested ROE, but we certainly are discussing doing so in this upcoming proceeding. Eric Thornburg: Yes. Spot on, Jim. I don't have anything to add to that. Thank you, Richard. Any other questions from you? Richard Sunderland: No, that's great. Operator: Our next question comes from the line of Angie Storozynski from Seaport Global. Angie Storozynski : So -- okay. I mean, the guidance looks bad even against, I think, low expectations. And I understand the incremental cost for purchased water. So I'm just wondering if there are any credit implications that you might see this year on the back of those low earnings and the low cash flows that you expect? Eric Thornburg: Angie, thanks for the question. Jim? James Lynch: Yes. Angie, I don't think so. I believe that most of our creditors look at the company's ability to go in and recalibrate within a 3-year period within a rate case. And I think they'll understand that we're at the forefront of our next rate case and have an opportunity to address the situation as we go in. I would expect there to be more of a long view in that regard as opposed to just what has happened this and in the prior year. Angie Storozynski : Okay. And then looking at year-over-year changes in usage patterns, I mean, I understand that COVID-related restrictions are sort of subsiding or so, we hope. But are you still seeing the elevated residential usage? And is that help that you gave had, especially in the third and fourth quarter of last year? Did you embed it in your guidance for '21? James Lynch: So Eric, I'll take that. So Angie, if you take a look at the real weather influence in 2020, that's where we benefited significantly. There was more of an offset, if you will, last year with regards to COVID between our usage at the residential level and our usage in business in terms of a drop-off in business and an increase in residential. We're actually starting to see business return a little bit, which was very encouraging, especially in California where we don't have any decoupling mechanism in place. And so when we set the guidance, we set it assuming a -- somewhat of a return to normal usage through a balance between what we will experience in our residential and what we would experience in our business usage customer -- customers. Angie Storozynski : So what happens -- I'm debating this myself. So if there are any sort of local restrictions or conservation calls given how dry it is, especially in Northern California, how would that impact that range? And again, I appreciate the fact that the hotter than normal weather helped to drive the, I forget, $0.10 or $0.15 variance last year versus your guidance. And I'm just basically wondering if conservation were to be imposed, if it's actually -- if it could actually go the other way? Eric Thornburg: Sure. I'll take that first, Jim. So the very conditions that have reduced our surface water benefit can drive higher sales, right? So if we continue to have above-average temperatures through the year and no additional rainfall, it's reasonable to expect that we'll see some increased usage across the state of California and through our service territory. If no drought is declared with attendant mandatory conservation, then I would expect to see our sales and production levels increase accordingly. If a drought is declared and there is mandatory conservation required, then we have protection on the downside through the WCMA application with the California PUC. But we wouldn't enjoy additional upside if customers complied with that request. So I think those are kind of the railings, if you will, Angie, that I see. Angie Storozynski : Okay. And then lastly, the pending GRC. So you haven't changed your expected production -- self-production volumes, right? That 1.8 billion gallons still stands, which is obviously meaningfully higher than what you realized in 2020, and what you will realize in 2021. So why you should basically attempt to modify that expectation going forward? And I understand that these are 2 particularly dry years. But again, I mean, you have a chance to, in a sense, protect yourself in this filing, against similar outcomes from an earnings perspective as we see now in 2 years in a row. Eric Thornburg: Yes. Of course, remember, the case was filed back in December and January, so before the end of this rainy season. So we will have the opportunity to update our evidence and have discussions with the public advocate and with the commission and put forth the strongest case, supported by not just 1 years of experience, but you do to maintain some credibility here. You have to look back over a reasonable period of time as well. So we're going to do all that we can to make sure that we balance the risk and the benefits here because surface water can be a substantial benefit as we saw as recently as 2019, where we had over 5 billion gallons of water that we could use. And so we want to balance the risk and the benefit here and put forth a strong case to do that. So we're updating our information, Angie. Angie Storozynski : Okay. And lastly is -- I mean, I know that the Connecticut rate case is still pending, but is there any comments you can offer to potential settlements, contentious points thus far in the process? Eric Thornburg: We've recently completed the first round of hearings over there. Our team reported that -- felt like that process went well that there was a real interest on all -- by all parties to make sure that they understood the facts and the evidence and the like. There wasn't any tone or tenor that caused us any concern. I'd say, the big discussion is on the cost of capital that's -- it's been quite some time since our last rate case there. And so my understanding, there was a considerable amount of time spent on that testimony from our witness as well as from the consumer counsels witness. So -- but I wouldn't describe it as contentious, it was just a lot of attention paid to that particular point. Angie Storozynski : And I'm sorry, I forgot to ask about the cost of capital in California, given the upcoming filing. So given the experience of the last 2 years, will you try to ask for some sort of an ROE adder, given the volatility in earnings you're experiencing for San Jose Water? Eric Thornburg: Yes. We're discussing that. We haven't filed our information yet, of course. And -- but I think we can make a clear case for -- as a result of that volatility that, that needs to be addressed in our cost of capital. So we're planning a multipronged approach here in our general rate case and our cost of capital proceeding and as well working with our wholesaler and the like to address this issue. Operator: Our next question comes from the line of Hasan Doza from Water Asset Management. Hasan Doza: I just wanted to understand a couple of your underlying assumptions a little better. First, on the total water available. Last year, you mentioned that the total water available in your California watershed was between 1 billion to 1.2 billion gallons. That was last year. So my first question is, how much in billions of gallons do you have right now in your watershed absent any additional rainfall? Eric Thornburg: Sure. Andy, you want to provide that? Andy Gere: Yes, I'd be happy to. Unfortunately, we have very little impounded. Outside of some environmental pools we need to maintain for wildlife, we have about 150 million gallons available to treat. Hasan Doza: So -- and what is the -- then what is the current surface water level at Lake Elsman roughly? Andy Gere: So it's about double that. So we need to leave an environmental pool of about 150 million. So we have just under 300 million gallons in the reservoir at this time. Hasan Doza: Got it. So basically, essentially, it's 0. So you'll be essentially buying what -- historically, what you had from Lake Elsman into purchased water. And I just wanted to find out because last year, I think you gave very specific amount of water you'd be buying. So in terms of billions of gallons, how much purchase water do you assume you will be buying in 2021 in billions of gallons? Eric Thornburg: Jim, do you have that information or at least, the incremental portion over -- yes, the surface water benefit? James Lynch: Yes. I'll take that, Eric. So effectively, we had baked in about 2.5 billion gallons to our original thought process as we were looking at 2021, which is in line with what was in our rate case as well as closer to the average over an extended period. So we -- for the year, we'll be buying incrementally about 2 billion gallons. Hasan Doza: So in total, you'll be buying like 4.5 billion gallons of purchased water? James Lynch: Well, again, we purchased a lot of water from the Santa Clara Valley Water District. And I believe about 50% thereabouts of our total supplies are purchased and 40% are pumped, from which we pay a pump tax. So all we're really talking about right here, Hasan, is the incremental piece. Hasan Doza: Yes, that's what I mean. The water that you're not getting from Lake Elsman, you were buying. And I just wanted to understand, is that incremental purchase? Is that basically 4.5 billion gallons? Or is that a different number? James Lynch: No. It would be 2 billion gallons. Hasan Doza: 2 billion gallons. Okay. And Jim, a follow-up question for you on the tax rate. In terms of the tax rate for Q2 and remainder of the year, do you -- should we assume a more normalized tax rate? How do you kind of think about that? James Lynch: Yes. I would assume a more normalized tax rate. We typically -- in the first quarter, that's our lowest income-producing quarter. And at the same time, it's when we are able to recognize tax credits, for example, for equity awards that are issued in the first quarter related to the prior year. And so there is this kind of a disproportionate amount of tax credits that we received in that quarter. It will average out over the remainder of the year towards a more normal rate. Hasan Doza: Okay. And I just wanted to ask one closing question for Eric in Connecticut. Eric, given your background in the state, I'm sure you saw late yesterday the Connecticut Commission on a different proceeding, Connecticut Light and Power, dealing with the hurricanes in that state, lowered the ROE on a cumulative basis for Connecticut light and power by about 90 basis points. So I just wanted to get your thoughts in terms of the risk on the ROE in your rate case, given now that the Connecticut Light and Power ROE is closer to 8.3%. So how do you kind of think about the risk in the ROE in Connecticut in light of yesterday's ruling? Eric Thornburg: Thanks, Hassan. Yes, I would completely decouple the events. The issue involving the electric utility you mentioned, I can recall 4 incidents in my time associated with Connecticut, where our operations were without power, some for as long as a week or more. And so my read of that situation was that PURA had, had enough and decided to implement a penalty on the ROE or increase it. And also, if you look back the track record with ROEs for water has been higher than the electrics. And I believe that, that is rooted in the view that water utilities are more of an environmental utility and that attracting and supporting capital investment in water is very important and is part of protecting and preserving that natural resource. So if anything, I feel like the Connecticut regulators really understand the primacy of drinking water investments. Thanks, Hasan, for your questions today. Operator: Our next question comes from the line of Jonathan Reeder from Wells Fargo. Jonathan Reeder: A lot of my questions have kind of been asked. If I can just take the previous discussion a step further, trying to reconcile the guidance with what it would have looked like had you had that 2.5 billion. So Jim, you said 2 billion of incremental purchased water, and that $4.2 million cost per billion gallons. What kind of tax rate should we, I guess, kind of be applying to that? James Lynch: Yes. I think our tax rate is typically between 15% and 20%, depending upon the discrete items that we are able to work through the tax provision in any one year. So I would focus on a range within that span. Jonathan Reeder: Okay. All right. That's helpful. And then I may have missed -- you specifically addressing it earlier in the Q&A, but any sense how you request to lower the 2.5 billion gallons of surface water, and pending GRC is being received by intervenors. Is that 1.8 billion being viewed as reasonable? And I know you're saying that they look at more of a 5 to 10-year kind of window. Is the 1.8 billion being viewed as reasonable? Or is there pushback still to that? Eric Thornburg: I'll take that, Jim. I wouldn't comment on it today, Jonathan. It's very early in the process. And what I would say is, certainly, the experience in the last 2 years really puts an exclamation mark on it. So I feel confident that we have a very strong case for modifying significantly the surface water -- company-owned surface water benefit in our rate design. More to come. Jonathan Reeder: Okay. Great. And then in Maine, in that rate case, if that rate smoothing tariff is adopted, will you recognize the revenue as it's collected? Or would the rate increase not be flowed through the financials until after the rate decision is received in Q2 2022? Is that more cash flow versus an actual earnings perspective? Eric Thornburg: Yes. Thanks, Jonathan. Jim, you have that one? James Lynch: Yes. Jonathan, it's more a cash flow issue. It's more easing in the incremental rate increase over a period of time and lessening the shock to the rate payers there. But we would not be recognizing that as revenue until the asset is put in -- basically, the plan is put in service, and we're entitled to begin charging a higher amount for that asset. Jonathan Reeder: Okay. And then last, I know we've already danced around it, but the cost of capital and water indicated, they plan to request a and no change in their authorized capital structure in their slide deck today. Any kind of preview you're willing to provide, even if it's not on the ROE at least cap structure? James Lynch: Yes. We're still finalizing that, Jonathan. So it would be a little premature for me to talk about that at this point. Operator: There are no further questions in the queue. Presenters, please continue. Eric Thornburg: Very good. Thank you so much, operator, and thank you, folks, for joining our call today. We will keep you posted, and we appreciate your support and interest in the SJW Group. Thank you very much. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
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SJW Group (NYSE:SJW) Earnings Preview: Key Financial Insights

  • SJW Group is expected to surpass Wall Street earnings estimates for the quarter ending March 2025, with projected higher revenues.
  • The company's financial metrics reveal a price-to-earnings (P/E) ratio of approximately 19.34 and a price-to-sales ratio of about 2.48.
  • A positive earnings surprise could potentially lead to an increase in SJW's stock price, depending on the outcome of the earnings call.

SJW Group, listed on the NYSE under the symbol SJW, is a prominent player in the water utility industry. The company provides water services to various communities, ensuring reliable and safe water supply. As a utility company, SJW competes with other water service providers, focusing on operational efficiency and customer satisfaction.

On April 28, 2025, SJW is set to release its quarterly earnings, with Wall Street estimating earnings per share (EPS) at $0.35 and revenue at approximately $160.5 million. According to Zacks Investment Research, SJW is expected to surpass these earnings estimates, despite a projected year-over-year decline in earnings. The company is anticipated to report higher revenues for the quarter ending March 2025.

The stock's movement will largely depend on whether SJW's actual results exceed these estimates. A positive earnings surprise could lead to an increase in the stock price, while a miss might result in a decline. The sustainability of any immediate price change and future earnings expectations will be influenced by management's discussion of business conditions during the earnings call.

SJW's financial metrics provide insight into its valuation and performance. The company has a price-to-earnings (P/E) ratio of approximately 19.34, indicating the price investors are willing to pay for each dollar of earnings. The price-to-sales ratio stands at about 2.48, suggesting that investors are paying $2.48 for every dollar of sales. The enterprise value to sales ratio is roughly 2.47, reflecting the company's valuation in relation to its revenue.

The enterprise value to operating cash flow ratio is approximately 9.46, indicating how many times the operating cash flow can cover the enterprise value. SJW's earnings yield is about 5.17%, representing the return on investment for shareholders. The debt-to-equity ratio is very low at 0.0027, suggesting minimal reliance on debt financing. Lastly, the current ratio is approximately 0.73, indicating the company's ability to cover its short-term liabilities with its short-term assets.

SJW Group (NYSE:SJW) Earnings Preview: Key Financial Insights

  • SJW Group is expected to surpass Wall Street earnings estimates for the quarter ending March 2025, with projected higher revenues.
  • The company's financial metrics reveal a price-to-earnings (P/E) ratio of approximately 19.34 and a price-to-sales ratio of about 2.48.
  • A positive earnings surprise could potentially lead to an increase in SJW's stock price, depending on the outcome of the earnings call.

SJW Group, listed on the NYSE under the symbol SJW, is a prominent player in the water utility industry. The company provides water services to various communities, ensuring reliable and safe water supply. As a utility company, SJW competes with other water service providers, focusing on operational efficiency and customer satisfaction.

On April 28, 2025, SJW is set to release its quarterly earnings, with Wall Street estimating earnings per share (EPS) at $0.35 and revenue at approximately $160.5 million. According to Zacks Investment Research, SJW is expected to surpass these earnings estimates, despite a projected year-over-year decline in earnings. The company is anticipated to report higher revenues for the quarter ending March 2025.

The stock's movement will largely depend on whether SJW's actual results exceed these estimates. A positive earnings surprise could lead to an increase in the stock price, while a miss might result in a decline. The sustainability of any immediate price change and future earnings expectations will be influenced by management's discussion of business conditions during the earnings call.

SJW's financial metrics provide insight into its valuation and performance. The company has a price-to-earnings (P/E) ratio of approximately 19.34, indicating the price investors are willing to pay for each dollar of earnings. The price-to-sales ratio stands at about 2.48, suggesting that investors are paying $2.48 for every dollar of sales. The enterprise value to sales ratio is roughly 2.47, reflecting the company's valuation in relation to its revenue.

The enterprise value to operating cash flow ratio is approximately 9.46, indicating how many times the operating cash flow can cover the enterprise value. SJW's earnings yield is about 5.17%, representing the return on investment for shareholders. The debt-to-equity ratio is very low at 0.0027, suggesting minimal reliance on debt financing. Lastly, the current ratio is approximately 0.73, indicating the company's ability to cover its short-term liabilities with its short-term assets.