SJW Group (NYSE:SJW) Q1 2024 Earnings Call Transcript

SJW Group (NYSE:SJW) Q1 2024 Earnings Call Transcript April 26, 2024

SJW Group isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the SJW Group Q1 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Andrew Walters, Chief Financial Officer. Please go ahead.

Andrew Walters: Thank you, operator. Welcome to the first quarter 2024 financial results conference call for SJW Group. I will be presenting today with Eric Thornburg, Chair of the Board, President and Chief Executive Officer. For those of you who would like to follow along, slides accompanying our remarks are available on our website at sjwgroup.com. Before we begin today, I would like to remind you that this presentation and the related materials posted on our website may contain forward-looking statements. These statements are based on estimates and assumptions made by the company in light of its experience, historical trends, current conditions and expected future results, as well as other factors that the company believes are appropriate under the circumstances.

Many factors could cause the company’s implied or actual results and performance to differ materially from those expressed or implied by the forward-looking statements. For a description of some of the factors that could cause actual results to be different from statements in this presentation, we refer you to the financial results press release and our most recent forms 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission, copies of which may be obtained on our website. All forward-looking statements are made as of today, and SJW Group disclaims any duty to update or revise such statements. As you will have an opportunity to ask questions at the end of the presentation. And as a reminder, this webcast is being recorded and an archive of the webcast will be available until July 24, 2024.

You can access the press release and the webcast at our corporate website. I will now turn the call over to Eric Thornburg. Eric?

Eric Thornburg: Welcome, everyone and thank you for joining us. My name is Eric Thornburg and it is my honor to serve as Chair, President and CEO of SJW Group. I’m pleased to share that in the first quarter of 2024, we met drinking water and environmental regulations, delivered on our public health and environmental stewardship commitments, and provided high quality water and service to customers. We also laid the foundation for a strong year by working constructively with regulators to secure approval of a general rate case in Maine and an infrastructure surcharge in Texas, investing $69 million in water and wastewater utility infrastructure, which constitutes approximately 21% of our $332 million 2024 capital expenditure plan and benefiting customers by executing our capital sourcing initiative and leveraging our national scale to save an anticipated $1.5 million through cost reduction and cost avoidance in 2024.

We delivered earnings per diluted share of $0.36 in the first quarter. We will talk more about this and the solid progress made on being a force for good as part of executing our strategic plan. Andrew will now review our financial results and regulatory updates in our state operations. Andrew?

Andrew Walters: Thank you Eric. Last evening after the market close, we released our first quarter 2024 operating results. In the first quarter, we reported revenue of $149.4 million, a 9% increase over $137.3 million reported in the same quarter of 2023. The increase was largely driven by rate increases. It is also worth noting that both our California and Connecticut operations have revenue protection mechanisms in place. Despite higher water production expenses, we were able to deliver net income for the quarter of $11.7 million, a 1% increase over the $11.5 million reported in the first quarter of 2023. Diluted EPS was $0.36 per share compared to $0.37 in 2023. As you can see, $0.26 of the revenue increase were driven primarily by rate increases in California and Maine and the infrastructure recovery mechanism in Connecticut.

Higher usage also contributed $0.05. The revenue increase was offset by higher water production costs, depreciation and amortization, as well as interest expense. $10 million of the revenue increase was from the rate and infrastructure adjustments and $2.6 million was attributable to higher usage and customer growth. Moving on to water production expenses. Our water production expense in the quarter increased 10% compared to 2023. The increase was principally driven by higher customer usage and rate increases from our water wholesaler in California. Total other operating expenses increased 7% year-over-year. The increase was primarily from increases in depreciation and amortization and higher administrative and general cost. Approximately $7 million in gross proceeds was raised in our first quarter through our at-the-market program.

At the end of the first quarter, we had $211 million drawn on our $350 million bank lines of credit, leaving $139 million available for short-term financing of utility plant additions and operating activities. The average borrowing rate for our line of credit advances during the quarter was approximately 6.54%. The average borrowing rate in the same period of 2023 was approximately 5.74%. The effective consolidated income tax rates for the first quarter of 2024 and 2023 were approximately 16% and 9% respectively. On January 2, 2024, San Jose Water filed a general rate case application with the California Public Utilities Commission that will set rates for 2025 through 2027. The application proposes a three year, $540 million capital expenditure program that addresses several key needs, including treating PFAs to meet drinking water standards recently finalized by the US EPA, reducing greenhouse gas emissions through solar generation, energy storage systems to replace diesel generators, as well as fleet electrification and advanced acoustic leak detection.

And we were advancing the CPUC’s environmental and social justice action plan to improve access to high quality water service, climate resiliency, and economic and workforce development. The decision can come as early as the fourth quarter of 2024 and be effective on January 1, 2025. As of January 1, 2024, San Jose Water has the benefit of a group insurance balancing account. The purpose of the account is to capture the differences between authorized and actual medical, dental, and opt-out insurance cost. This is yet another regulatory mechanism that helps us to manage the escalating and unpredictable expense. We will explore opportunities to optimize the expense in the future to benefit our customers. The 2024 water cost of capital mechanism adjustment was effective on January 1, 2024.

The return on equity is 10.01%, less a 20 basis point reduction due to the reauthorization of the water conservation memorandum account for an authorized ROE of 9.81%. Our cost of debt is 5.28% and the authorized rate of return is 7.75%. For reference, our return on equity in the first quarter of 2023 was 8.9% less 20 basis points for the water conservation memorandum account. On February 2, 2024, San Jose Water, along with three other Class A California water utilities received approval from the CPUC for a one year deferment in the 2024 cost of capital filing. With this decision, the CPUC extended the initial filing deadline from May 1, 2024, to May 1, 2025. The approval deferral includes a provision that the water cost of capital mechanism remains in place for 2025 and allows it to adjust up or down in accordance with movements of 100 basis points or more in Moody’s AA Bond Index between October 1, 2023 and September 30, 2024.

Installation of smart meters as part of our advanced metering infrastructure project is underway. We are planning to invest approximately $27 million in the AMI project in 2024. This is a $100 million project that is separate from the general rate case capital budget and the majority of the installation is expected between 2024 and 2026. In Connecticut, our general rate case application is pending before the public utility regulatory authority. Our request is for $21.4 million or 18.1% increase in annual revenues. Approximately two thirds of the requested rate increase is related to infrastructure investment projects. The application also includes a proposal for expanding our low income water rate assistance program. We were the first water utility in the state to offer this type of rate assistance program.

We’re hopeful that PURA will authorize our requested expansion of this important program. The final decision on the Connecticut general rate case is expected in late June with any approved revenue increase to be effective on or about July 1, 2024. New rates for Maine Water’s Biddeford-Saco Division were effective on January 1, 2024, following approval of the Maine Public Utility Commission of a stipulation agreement between Maine Water and the Office of Public Advocate. The company’s annualized revenue is expected to increase by $2.6 million. Maine Water had applied for the increase to cover the operating expenses and increased borrowing costs from construction of the new Saco River Drinking Water Resource Center. Other provisions of the approved stipulation agreement include a return on equity for Biddeford-Saco division of 9.5% with an assumed 51% equity, 49% debt capital structure.

The ROE and capital structure will also apply to future water infrastructure surcharges. A general rate case stay-out provision in Biddeford-Saco division through January 1, 2027. The stay-out does not include infrastructure surcharge filings. On March 22, 2024, the MPUC approved Maine Water’s infrastructure surcharge filing with the Camden and Rockland Division, which is expected to generate approximately 158,000 in annualized revenues. Turning to Texas, we continue to see strong growth in our Texas service area as evidenced by robust developer interest in water and wastewater connections. The number of outstanding development units with the potential for new connections is approximately 22,000 units. This is not surprising as Texas Water currently serves three out of five fastest growing counties in the United States, according to the US Census Bureau.

With more than 28,000 water connections and 1,000 wastewater connections in the area between Austin and San Antonio, the company has quadrupled its service connection since 2006. We intend to continue this momentum through prudent acquisitions, organic growth and securing strategic water resources. One example of the opportunistic acquisition strategy is the 3009 water system in Comal County. It serves approximately 270 water connections and strategically located within our service territory. Our application to acquire 3009 is pending before the Public Utility Commission of Texas and a decision is expected in the third quarter of 2024. On March 21, 2024, the PUCT approved our application for a system improvement charge in Texas. The decision authorizes Texas Water to add certain utility plan additions made since 2020 to its rate base, thereby increasing revenue and avoiding a general rate case in 2024.

We expect an increase in annualized revenue of $1.6 billion. The US Drought Monitor continues to classify our Texas service area as being moderate to severe drought. We are targeting voluntary water use reductions that vary on local drought conditions. Overall, we expect lower water usage in 2024 if the drought continues. With a diverse portfolio of water supplies, a growing wastewater business and continued additions to the customer base through organic growth and acquisitions, we are pleased with Texas Water’s increasing contributions to consolidated earnings and remain optimistic about its prospects. We are reaffirming our 2024 guidance of $2.68 and $2.78 of net income per diluted share, which is consistent with our non-linear long-term growth rate of 5% to 7%.

We expect equity issuance of approximately $55 million to $65 million, excluding acquisition growth to support our strong capital investment program. We maintain our five year capital investment outlook of $1.6 billion, which includes approximately $230 million in estimated PFAs remediation based on the maximum contaminant levels in the previously proposed regulation. The factors underlying our 2024 guidance include a return on equity increase in California 9.31% to 9.81% net of the 20 basis point reduction for the reimplementation of the WCMA effective January 1, 2024. The impact of the completed Biddeford-Saco rate case was 9.5% ROE and 51% equity, 49% debt effective capital structure as of January 1, 2024. Constructive regulatory decisions on current and prospective regulatory filings, strategic reinvestments in the business in 2024, and a guidance range is consistent with our long-term growth rate.

An important note is in April 2024, SJW Land Company completed the sale of a warehouse building of the Tennessee properties for $27 million. The estimated pretax gain on the sale is $7 million, which is not a contributor to our 2024 guidance or first quarter earnings. Further, we reaffirm our stated long-term growth rate of 5% to 7% that is anchored off 2022 diluted earnings per share of $2.43, which is nonlinear because of rate case cycles. With that, I’ll turn the call over to Eric.

Eric Thornburg: Thank you, Andrew. Earlier this month, the United States Environmental Protection Agency issued final standards for six PFAS compounds. SJW Group strongly supports these standards and is committed to being in full compliance with new regulations for PFAS monitoring, reporting and maximum contaminant levels within the timeframes allowed for by the EPA. Our most recent estimate for PFAS treatment is approximately $230 million in capital additions for our operations in California and Connecticut, which we expect will fit nicely within our five year $1.6 billion capital expenditure plan. In Maine, we currently have one water system where we have detected the presence of PFAS. That system is supplied by a neighboring water utility that is actively working to address the situation.

We also are committed to holding the manufacturers of PFAS and polluters ultimately responsible for the cost to treat these contaminants and our parties in settlement or pending settlement agreements with several manufacturers. It’s too early to tell how much SJW Group will receive from the settlements or when, but we will continue our pursuit to minimize the costs passed on to our customers. One of the ways we measure our impact and success as a company is how have we been a force for good. We use our core values to help us deliver benefits to our customers, local communities, employees and the environment. Between 2019 and 2022, we reduced our Scope 1 and Scope 2 greenhouse gas emissions by approximately 20%. Our 2023 data will be reported when the results have been audited by an organization accredited by the ANSI National Accreditation Board under ISO 14066.

We’re extremely proud to have had our Connecticut utility named as a top Workforce USA for 2024 by USA TODAY. What is most gratifying is that this recognition is based solely on anonymous surveys of our employees who gave us high marks in appreciation, professional development and purpose and values. Our company was also recognized in the prestigious Newsweek Excellence 1000 Index for 2024. Inclusion in the index is for exemplars of corporate excellence with a firm commitment to best practices in business and financial growth, servicing customers, stakeholders and communities, and social responsibility and ethical standards. Both awards are testaments to the values of the company and our commitment to being a meaningful force for good in the communities where we live, work and serve.

We would like to extend a warm welcome to California Public Utility Commissioner, Matt Baker and express our deep appreciation to outgoing Commissioner, Genevieve Shiroma for her four decades of public service. We look forward to working with Commissioner Baker, his peers and their staff to address the water related issues facing California’s water utilities. I am very pleased to welcome Tanya Moniz-Witten as President of San Jose Water Company. She comes to us from National Grid where she was Vice-President of Electrical Distribution Field Operations. Prior to that, she had several leadership roles at Pacific Gas and Electric here in California. Her leadership qualities, her character and familiarity with the South Bay Area make her a fantastic addition to the team.

We also recently welcomed Nazan Riahei as Vice-President of Communications for SJW Group. She most recently served as a managing director at Abernathy McGregor. She’s a trusted expert who reflects our core values and has the skills and background to help SJW Group enhance its communications and build upon its meaningful connections with stakeholders and elevate our brand nationally. As I’ve shared before, our people are what makes the difference at SJW Group. I continue to be inspired by the contributions of our talented teams across our national footprint as they consistently provide an essential service with integrity, reliability and peace of mind for our customers. I’m confident our team’s commitment to serving customers and communities, the environment and shareholders will continue to excel SJW Group’s ability to deliver value to our stakeholders and reinforce our strong position for a successful future.

And with that, I’ll turn the call back over to the operator for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Richard Sunderland with JP Morgan. Your line is open.

Richard Sunderland: Hi. Good morning. Thank you for the time today.

Eric Thornburg: Hey. Hi, Richard. Thanks for listening in today.

Richard Sunderland: Appreciate the comprehensive updates here and a couple of different things to dig into. Maybe first and foremost, with the Connecticut rate case going on, curious how you’re feeling about the Connecticut backdrop overall. I recognize this isn’t you, but there’s been attention on your peer Aquarian’s appeal being denied and more litigation there. Just how do you feel about the regulatory pendulum and the overall utility backdrop in the state currently?

Eric Thornburg: Yeah. Thank you, Richard. I’ll share my thoughts on that. Connecticut for many, many years was really an exceptional state for water utilities to invest capital and earn a return and solve problems for customers and acquire small utilities and solve problems for them as well. And I remain very optimistic for Connecticut in regards to the regulation of water utilities. We were able to learn a lot by watching the Aquarian rate case and Avangrid’s case, and we took to heart the results of those cases and studied the messages that were clearly sent. And so our team in Connecticut, I think, did an exceptional job reimagining the process. I don’t think that Connecticut regulators are saying we don’t want investment in the state.

I think what they’re saying is that we want you to really justify it, tell us exactly why they’re needed, and make sure you back it up thoroughly. So we’ve taken that to heart. We put together, like I said, an exceptional case. I’m so proud of our team. And we expect a draft decision on May 29, so we’ll know just how well we did. And I think — I think the regulatory climate there has just changed to reflect the need for additional information and address the affordability concerns that everybody has regarding utility bills. So we hope we’ve learned a lot, Richard, and applied that learning so that we have very constructive outcome. I do expect that we will be treated very fairly there.

Richard Sunderland: Got it. Thank you for all the color. Turning to Texas, could you speak a little bit more to the usage trends relative to the drought ramifications? I guess I’m curious, from a high level, how things are trending relative to guidance assumptions?

Eric Thornburg: Yeah. I’ll start and then I’ll ask Andrew to cover it in specifics. But we were just in Texas earlier this week for our first quarter Board meeting, and we were able to see for ourselves. Our Canyon Lake, which is — that is managed by the GBRA there, I mean, it’s substantially below recent historical levels and so there’s significant drought in that particular area of Texas. So the threat is real. The rest of the state actually looks pretty good, but it’s just a big red drought zone kind of right in the heart of the state there. So we’re taking our actions to be prepared for that this summer, and I think it indeed will have an impact on our Texas business there. Andrew?

Andrew Walters: Yeah, I think that’s — you summed it up well, Eric. And I would just add, Rich, that from our perspective, we took into our forecast a range of different outcomes from a weather perspective, and we’re still within those bounds as it stands today. So unless something changes more significantly in the future, we will update you, but we still feel good about where we’re at as it relates to our overall forecast.

Richard Sunderland: Understood. Very clear. And then one final one from myself, if I may. The guidance slide, I see the change in language, or, I should be clear, the addition of language around independent of real estate sales or M&A activities, is that just reflective of the Tennessee transaction you referenced in the script or is there anything else you have going on in the backdrop in terms of portfolio changes that’s in process?

Andrew Walters: No, that’s — you’ve hit it spot on. It’s really related to the specifics on the Tennessee properties and the subsequent event transaction which I described and be more fully disclosed in the queue once it’s out. But again, I didn’t want anybody to confused that our guidance and where we are, those are the core earnings of where we expect the business to perform at. And that’s what we’re judging ourselves off of.

Richard Sunderland: Perfect. Thank you again. And thank you for the time today.

Eric Thornburg: Thank you, Richard.

Operator: Thank you. [Operator Instructions] One moment for out next question. Our next question comes from Gregg Orrill with UBS. Your line is open.

Gregg Orrill: Yeah. Thank you. Good afternoon.

Eric Thornburg: Hey, hi, Gregg.

Gregg Orrill: Hey. With regard to Connecticut, recognizing there’s a draft decision due May 29, are there any — are there prospects for settlement or partial settlement in Connecticut? What are your thoughts about that?

Eric Thornburg: Yeah. No, there are not. It’s really — the proceedings have concluded and briefs have been written and so now it’s just up to the commission to weigh the evidence and write their decision.

Gregg Orrill: Okay. And how do you think about the sort of legacy, sort of pre-PFAS rule liability for the company on that topic?

Eric Thornburg: Well, as we disclose — I’m sorry, Richard. Go ahead. I’m sorry, Gregg.

Gregg Orrill: That’s it. Thanks. Yep.

Eric Thornburg: Okay. Apologize for stepping on your line there. Hey, we have a very good understanding of what the capital needs are to address the newly promulgated PFAS standard in both California and Connecticut. We have projects even underway now in Connecticut. So we think by the end of the year, we’ll have a couple of — couple of wellfields already addressed. And so we feel like we’re in a really good spot there and very confident that we’ll receive regulatory recovery of those capital investments. And so feel like we’ve got a really good start in the state and as well in California. So very optimistic about our ability to conclude our projects well before the five year time horizon which is provided by EPA to achieve compliance.

Andrew Walters: Eric, I might just add to that, too, that the amounts are obviously estimates based off the time, inflation and other factors could have an impact on where the total actually comes out to be over time. But the other thing that Eric mentioned in his discussion with us was we are focused on ways to save money and other ways to create that room in the bills of our customers so that we can confidently recover this without any diminution in other capital projects as well.

Gregg Orrill: All right. Thanks. Have a good weekend.

Eric Thornburg: Thank you, Gregg. Appreciate it. Thank you very much.

Operator: Thank you. I’m showing no further questions at this time. I would now like to turn it back to Eric Thornburg, Chief Executive Officer, for closing remarks.

Eric Thornburg: Thank you, everyone for joining us today. As you heard, it’s been a solid start to the year and we have a lot more to look forward to into 2024, including finalizing our rate case in Connecticut, implementing our AMI initiative in California, pursuing the acquisition and close of 3009 in Texas, advancing our PFAS remediation strategy and realizing our national capital sourcing initiative and much, much more. SJW Group proudly leverages that national platform we have to support our local operations in their shared mission to serve high quality water to $1.5 million people across four states. And while we do this, we make sure we execute our growth strategy and deliver shareholder value, including paying a dividend, which we have faithfully done for 80 straight years.

And we’ve raised that dividend for 56 consecutive years. I recognize that it’s our culture of service to our customers and the local communities that underlies our success. And I’m very proud of our people who make it all possible. And we look forward to sharing our progress with you next quarter as we continue to execute on our growth strategy. In the meantime, Andrew and I, along with the rest of the SJW group team are always available for follow-up. Thank you again for your interest in SJW group.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.