SJW Group (NYSE:SJW) Q4 2024 Earnings Call Transcript

SJW Group (NYSE:SJW) Q4 2024 Earnings Call Transcript February 27, 2025

Operator: Good day, and thank you for standing by. Welcome to the SJW Group Fourth Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only. After the speaker’s presentation, there will be 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 Andrew Walters, Chief Financial Officer and Treasurer of SJW Group. Please go ahead.

Andrew Walters: Thank you, operator. Welcome to the 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; and Bruce Hauk, Chief Operating Officer. For those 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 actual results and performance to differ materially from those expressed or implied by 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. You will have an opportunity to ask questions at the end of the presentation. This webcast is being recorded, and an archive of the webcast will be available until April 28, 2025.

You can access the press release and the webcast at SJW Group’s website. In addition, some of the information discussed today includes the non-GAAP financial measures of adjusted net income and adjusted diluted earnings per share that have not been calculated in accordance with generally accepted accounting principles in the United States or GAAP. These non-GAAP financial measures should be considered as a supplement to the financial information prepared on a GAAP basis rather than an alternative to the respective GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the table in the appendix of our presentation. I will now turn the call over to Eric Thornburg.

Eric Thornburg: Thank you, Andrew. Welcome, everyone, and thank you for joining us. I’m Eric Thornburg, and it is my honor to serve as Chair, President and CEO of SJW Group. Before we review SJW Group’s strong performance in 2024, I want to take a moment to share with you that earlier today, I announced my retirement as President and Chief Executive Officer of SJW Group effective June 30. It has been my honor to lead the team of talented individuals across our entire organization and to be a part of this profession for 43 years. The Board of Directors has appointed Andrew Walters, our Chief Financial Officer and Treasurer, to be my successor as CEO. Andrew has been a true partner and a driving force behind our success. He’s an outstanding choice to lead the company.

Bruce Hauk, our Chief Operating Officer, will take on the added role of President, Regulated Utilities; and Kristen Johnson, our Senior Vice President and Chief Administrative Officer, will take on the added role of President of our shared service organization. These promotions will drive our organization forward. More information on these leadership changes is available in the news release we issued prior to this call. Now let’s get back to our 2024 achievements. I’m pleased to share that we continue to meet drinking water and environmental regulations, deliver on our public health and environmental stewardship commitments and provide high-quality water and service to customers. We also delivered strong financial results, including a nearly 11% increase in net income from 2023 on a GAAP basis.

Our performance reflects our continued execution of our proven growth strategy, focused on investments in our infrastructure and water systems across our national footprint and constructive engagement and consensus building with key local stakeholders, all with an eye on affordability. Some highlights this year, include the California Public Utilities Commission approved a constructive decision in San Jose Water’s 2025 through 2027 general rate case. Also earlier this year, the CPUC approved our request to defer our 2025 cost of capital filing to 2026, which maintains our current return on equity, cost of debt and overall rate of return through 2026. We secured approval for increases in our infrastructure recovery mechanism in Maine and filed a petition with the Maine Public Utilities Commission to unify our 10 separate rate districts under a single tariff.

In Connecticut, we had a record year of recovery through WICA, the Water Infrastructure and Conservation Adjustment. The Texas Public Utilities Commission approved our first system improvement charge last year, and we filed our second request in September. In 2024, we invested $353 million in water and wastewater utility infrastructure across all four states. And as we will discuss later in this call, we are increasing our five-year capital budget. Additionally, SJW Group was recognized by Newsweek as one of America’s — most Responsible Companies 2025. Importantly, we continue to create long-term shareholder value with earnings per diluted share of $2.87 and adjusted non-GAAP earnings per diluted share of $2.95 in 2024. By any measure, 2024 was an outstanding year for SJW Group.

We reinforced our strong foundation for sustained growth and long-term value creation, and I want to thank our talented team across the nation for making that happen. At the same time, our industry is at a pivotal moment. Aging infrastructure, evolving regulatory requirements and the increasing impacts of climate change, ranging from severe droughts to devastating wildfires, demand forward-thinking solutions. In 2024, we saw firsthand the toll of extreme drought in our Texas service area, reinforcing the need for greater system resiliency, redundancy and efficiency. We are future-proofing our water systems through a disciplined, long-term investment strategy that includes replacing at least 1% of aging pipelines annually, enhancing water supply and storage, improving system efficiency and resiliency and building advanced treatment facilities to meet new water quality standards, including PFAS compliance.

These investments are critical to providing for long-term reliability and public health, while strengthening our ability to adapt to changing climate conditions. At the core of our approach is financial discipline and a steadfast commitment to affordability. We are leveraging our scale, operating efficiencies and technological advancements to manage costs while providing for our systems to remain robust, resilient and reliable. We’ll discuss this all in more detail later in the call. But for now, let me turn it over to Andrew to take you through our financial results. Andrew?

Andrew Walters: Thank you, Eric. Yesterday after the market closed, we released our 2024 and fourth quarter operating results. We reported $2.87 diluted earnings per share and $2.95 adjusted diluted earnings per share for 2024, which was ahead of guidance. I’ll provide further details on our 2024 results in a couple of minutes. We are also announcing our 2025 guidance range of $2.90 to $3 per share. SJW Group’s five-year capital plan is increasing 25% to approximately $2 billion from our prior plan. We are extending our 5% to 7% earnings growth rate through 2029, and we expect to be on the top half of that range. In 2024, we reported revenue of $748.4 million, a 12% increase over the $670.4 million reported in 2023. GAAP net income of $94 million increased 11% over 2023 and adjusted net income was $96.8 million, a 15% increase over the prior year.

Diluted earnings per share came in at $2.87 compared to $2.68 in 2023, and we saw an 11% increase in our adjusted earnings per share of $2.95. Factors impacting 2024 earnings per share are detailed on this bridge. Rates and usage drove a revenue increase of $1.79 over 2023. As announced last quarter, we had tax method change related to the repairs deduction that added $0.11. We do not expect favorable tax activity of this magnitude in the future, which will be addressed in our guidance discussion. The revenue increase was partially offset by higher water production expense of $0.82, an increase in other operating expense of $0.42, higher interest expense of $0.12 and an increase in the number of shares outstanding of $0.11. I would like to add the $0.11 in tax method change was offset by $0.10 in the prior year favorable income tax reserve.

Our revenues increased 12% in 2024. Rate increases, primarily in California and Connecticut contributed $36.1 million, $26.1 million is attributable to pass-through water costs for our wholesalers and higher customer usage added another $14.9 million. Partially offsetting the increase was a decrease of $6.6 million in regulatory mechanisms primarily in California. Water production expense increased 14% in 2024 and was largely driven by rate increases from our water wholesalers and $10.1 million in expense associated with higher customer usage. Other operating expenses increased 8% and were mainly the result of higher administrative and general costs of $9.9 million, a $7 million increase in depreciation and amortization and higher maintenance costs.

We also incurred $3.4 million in costs related to a potential acquisition. These costs have been added back to adjusted net income and adjusted earnings per share and reflected separately on this waterfall. These increases were partially offset by a $6.1 million decrease in the allowance for customer credit losses. Approximately $87 million in gross equity proceeds was generated in 2024 through our at-the-market equity program, or ATM, including $65 million for infrastructure investment and $22.1 million for the City of Cupertino concession fee. On October 29, 2024, we entered into an agreement for a new $200 million at-the-market program to replace one that was set to expire on November 17, 2024. At the end of the year, we had $119 million drawn on our $350 million bank lines of credit, which left $231 million available for short-term financing of utility plant additions and operating activities.

In the fourth quarter, we raised a total of $35 million through long-term debt offerings in Maine and Texas that was primarily used to pay down our bank lines of credit. The average borrowing rate for our credit advances in 2024 was approximately 6.44% compared to 6.29% last year. The effective consolidated income tax rates for 2024 and 2023 were approximately 9% and 7%, respectively. The increase in the effective income tax rate was primarily due to the year-over-year effect of higher uncertain tax position reserve release in 2023, which was partially offset by the benefit of a tax accounting method change in 2024. Had we not had this accounting method change, it would have added 3.5% to our 2024 effective tax rate. In addition to the EPS guidance I mentioned earlier, we are announcing our 2025 equity issuance CapEx guidance and updating our long-term growth guidance.

Equity issuance of $120 million to $140 million through our ATM is expected, excluding acquisition growth. We intend to invest $473 million in CapEx during 2025. We are extending our long-term growth rate of 5% to 7% through 2029 and guiding to the top half of the range. The growth rate is anchored off our 2022 diluted earnings per share of $2.43 and is nonlinear because of rate case cycles. This growth is driven by an increase in our long-term capital plan, which I will discuss in a minute and continued constructive regulatory outcomes. The factors underlying our 2025 guidance include strategic investments in the business and timing of infrastructure riders as well as our general rate case recoveries. Potential for continued drought in Texas and 2025 guidance is independent of real estate sales or M&A activities.

Bridging our actual 2024 adjusted diluted earnings per share to the midpoint of the 2025 guidance range, we expect to see an increase in revenues of $1.36 driven by full year Connecticut Water’s 2024 general rate case, new rates from San Jose Water’s general rate case that was effective on January 1 and infrastructure recovery mechanisms. Also, contributing is revenue from water wholesaler pass-through charges. Among the items partially offsetting the increase are higher production cost of $0.61, primarily due to wholesaler price increases, dilution from our equity issuance of $0.21 and interest expense of $0.18. As we have mentioned, our updated five-year capital plan forecast is now at $2 billion, a 25% increase from our prior plan. The substantial increase is necessary to meet the needs outlined by Eric earlier and will be discussed in greater detail by Bruce.

As a result of the increased CapEx deployment, we are also forecasting net utility plant growth of 6.6% over the five-year horizon. Further, approximately two-thirds of our investments are recovered through forward-looking rates and infrastructure recovery mechanisms. Now, I will hand off to Bruce Hauk, Chief Operating Officer and my partner for updates on state operations and significant increase in our five-year CapEx forecast.

Bruce Hauk: Thank you, Andrew. As Eric mentioned earlier, the CPUC issued a final decision on San Jose Water’s 2025 through 2027 general rate case on December 19, 2024, and new rates went into effect as planned on January 1, 2025. The final decision was based on a settlement agreement negotiated with the Public Advocates Office that we view as constructive. It includes $450 million in capital expenditures for the three years covered by this general rate case. Our ongoing advanced metering infrastructure project is separate from the GRC capital plan. It also allows for greater revenue recovery through the service charge, now at 48% and further aligns authorized to actual usage through a lower sales forecast. The decision provides a $53.1 million or 9.4% total revenue increase at the 2025 through 2027 authorized sales and customer forecast.

The annual step increases range between approximately 2.6% to 3.9%. We view this decision as a testament to our ability to work with stakeholders and regulators to achieve constructive outcomes that are beneficial to our customers and local communities while also delivering shareholder value. On January 14, 2025, the CPUC granted a one-year deferment for the cost of capital proceeding for San Jose Water and 3 other Class A California water utilities. The filings that were due in May 2025 are now due to be filed in May 2026 for rates effective on January 1, 2027. The deferment maintains San Jose Water’s ROE of 9.81%, which includes a 20 basis point reduction related to the water conservation memorandum account, 5.28% cost of debt and authorized rate of return of 7.75% for 2026, subject to any adjustments resulting from the water cost of capital mechanism.

The deferment alleviates administrative processing costs for both the water utilities and CPUC staff. The deferment maintains the WCCM through 2026, which would adjust the ROE and cost of debt up or down if there is movement of 1% or more in the Moody’s AA utility bond index between October 1, 2024, and September 30, 2025. Our agreement with the City of Cupertino, California to manage the city’s water system became effective on October 1, 2024. The initial term of the agreement is 12 years with a provision to extend it for an additional eight years. Under the new agreement, we will continue to operate and maintain the city’s water system. As Andrew stated earlier, we paid the upfront $22.1 million concession fee with equity through our ATM program in 2024, and we will make annual payments of approximately $1.8 million subject to adjustments each year based on a specified construction cost index.

We have been partnering with the City of Cupertino since 1997. The arrangement has proven beneficial to the customers of San Jose Water and customers of Cupertino. As a large neighboring water system, we bring scale and efficiency to the city’s water system operation and increased scale for San Jose Water that allows us to better serve our customers. In Connecticut, our Connecticut Water team invested $41.9 million in water infrastructure and conservation adjustment projects in 2024, our largest annual spend since the inception of WICA more than 15 years ago. We began recovering a portion of that investment in the fourth quarter when the Connecticut Public Utilities Regulatory Authority authorized a $4.3 million increase in annualized revenue through WICA that was effective on October 1, 2024.

We filed a new WICA application and our annual reconciliation with PURA on January 28, 2025. We are requesting a $1.6 million increase in revenues for $15.7 million in eligible completed projects. If the application is approved as requested, our cumulative WICA surcharge would be 4.9%. A decision on our application is expected in the first quarter. We are continuing to work with state lawmakers and regulators on a WICA-like mechanism called the Water Quality and Treatment Adjustment that would allow cost recovery for water treatment and remediation infrastructure between general rate cases. If enacted, it would help smooth rate impacts for PFAS compliance by distributing costs more predictably over time. In Maine, we filed a petition with the Maine Public Utilities Commission on December 31, requesting that the company’s 10 separate rate district tariffs be unified into a single tariff.

If approved, it would streamline general rate case and water infrastructure charge applications, which are currently filed on a district-by-district basis. This will improve administrative efficiency, minimize regulatory lag and ease the burden on the regulatory agencies and their staff. Further, in an environment of ever-increasing water quality regulation and the need to replace aging infrastructure, a unified rate plan across Maine will allow us to address system needs across the company’s footprint, while maintaining customer affordability. We filed a general rate case application for the Camden-Rockland division in October, requesting a revenue increase of $1.1 million or 15.9% above current authorized revenue. A decision is expected in the second quarter of 2025.

In our Texas service area, we have been experiencing significant drought and have had water conservation measures in place for much of 2024, which resulted in lower water usage. We are doing several things to make our water systems in Texas more resilient to weather extremes, so that we can enhance system reliability and the availability of water supply for our current customers. First, in 2023, we acquired KT Water Resources, which has projected 6,000 acre feet of untapped water supply in the heart of Comal County. Bringing this supply online to serve customers is a priority for us. In addition to addressing water supply, we are pleased to share that resiliency has been improved through the installation of standby generators at nearly all our water systems in Texas, ongoing replacement of aging infrastructure and focus on additional technologies to continue strengthening our systems.

Integrating KT Water into our water systems is a significant investment, but KT Water alone won’t future-proof us against ongoing droughts. That’s why we are also investing in targeted distribution system upgrades and interconnections to better move water through our systems to where it’s needed. At the same time, we are driving efficiency improvements through advanced leak detection and pressure management to reduce water loss and strengthening system reliability, making the most of our current water supply sources to serve customers. KT Water is a multiphase project that is scheduled to be completed by the end of 2026. All-in-all, we are planning to invest a total of $133 million in Texas this year on infrastructure improvements. Similar critical needs exist across our other service areas.

In Connecticut, our estimated cost for PFAS treatment has risen from $120 million to $190 million. In California, we estimate $110 million is needed, bringing our total PFAS-related capital commitment to $300 million. Another significant cost driver is pipeline replacement. In 2024, we invested over $110 million, and we expect that spending to increase further as we maintain our goal of replacing 1% of our pipeline infrastructure annually. Additionally, we invested approximately $27 million in San Jose Water’s advanced metering infrastructure project in 2024. The cost of this project is estimated at $100 million, with the bulk of the remaining investment planned for 2025 and 2026. The chart on this slide provides a state-by-state breakdown of the $473 million in capital expenditures planned for 2025 and our five-year CapEx plan.

As a reminder, San Jose Water has forward-looking general rate cases and Connecticut Water, Maine Water and Texas Water all have infrastructure recovery mechanisms. As Andrew mentioned earlier, given the scale and urgency of these investments, we have updated our five-year capital forecast from $1.6 billion to $2 billion. With that, I will turn the call over to Eric.

Eric Thornburg: Thank you, Bruce. One of the ways we measure our success as a company is by asking how are we being a force for good? Our commitment to sustainability, safety and sound governance isn’t just about doing the right thing. It also contributes to operational savings, increased efficiency and long-term value creation. A great example of this is our investment in sustainable power and safety initiatives, both of which drive measurable benefits across our operations. We’re proud to share that between 2019 and 2023, we reduced our Scope 1 and Scope 2 emissions by nearly one-third and are well on track to achieve our target of 50% reduction by 2030. Improving efficiency and reducing our impact on the environment is the right thing for our stakeholders.

I’m also extremely pleased to announce that in 2024, Connecticut Water was recognized by the Connecticut Construction Industries Association with a platinum level award for construction safety. This marks an incredible 21st consecutive year of safety recognition, an achievement that speaks to the unwavering commitment of our teams. After two decades, it would be easy for complacency to set in. But for us, safety isn’t just a policy, it’s a mindset. Whether in the trenches or in the office, our teams work tirelessly every day to ensure safe choices are made to protect themselves and their coworkers. Safety remains our highest priority. These initiatives are just a few of the reasons SJW Group has been named one of America’s, most Responsible Companies 2025 by Newsweek.

This recognition is based on extensive research and analysis across three pillars of environmental, social and governance, including more than 30 key performance indicators, energy efficiency and a reputation survey. At SJW Group, we’re not just committed to building a resilient water system. We are dedicated to doing so in a way that is sustainable, responsible and built for the future. Looking ahead, our priorities are clear. We will continue executing our long-term investment strategy with financial discipline, operational excellence and an unwavering commitment to affordability. I’m also pleased to share that we have established the Force for Good Foundation. It is a not-for-profit corporation funded by SJW Group that plans to make contributions to selected charitable organizations with a focus on the communities served.

We look forward to sharing more in the future about the foundation and how it is furthering our community outreach and engagement efforts. The Force for Good Foundation is just one example of how we are not just preparing for the future, we are shaping it. In 2024, we continued to build a world-class team. In the fourth quarter, we welcomed two highly accomplished leaders, who are already bringing valuable expertise to our organization. Ann Kelly, our new Chief Accounting Officer, joins us from American Electric Power, where she served as CFO. Douwe Busschops, our new Chief Information Officer, comes from Veolia, North America, where he was Vice President and CIO for their Municipal Water division. Both Ann and Douwe bring deep expertise in their fields and have already made a positive impact.

They’re helping us execute on our modernization and efficiency goals, helping us to deliver strong results for both customers and shareholders. With that, I will turn the call back over to the operator.

Operator: [Operator Instructions] Our first question comes from the line of Richard Sunderland with JPMorgan.

Q&A Session

Eric Thornburg: Hi, Richard.

Andrew Walters: Rich, we’re not hearing you.

Operator: Rich, you may be on mute. Let me move on to the next question. Our next question comes from Roger Liddell with Clear Harbor Asset Management.

Roger Liddell: Yes, good afternoon or good morning.

Eric Thornburg: Hi, Roger.

Roger Liddell: Hello, Eric.

Eric Thornburg: Hi, Roger. Good to hear from you.

Roger Liddell: Well, great to hear from you. And I’ve had the privilege of observing your management skills for 20 years now. That has been a privilege, and I regret that you are electing to move on. In fact, Eric, I have a complaint. Didn’t you and I have an agreement that you wouldn’t retire until I retired?

Eric Thornburg: You just got more longevity to me, Roger. So thank you for that very kind words there. I appreciate you.

Roger Liddell: And I hope the industry will be able to benefit from your perspective, including cyber vulnerability, cyber issues because I think you bring something to the party there that’s sorely needed in any event to the business at hand. In the unaccounted for water area, which you didn’t happen to touch on, but which has interested me, if I recall correctly, the unaccounted for water rate in California in your — in San Jose is in the 7% range, breathtaking figure and some 15% in other jurisdictions. Is that 7% figure a peculiarity of California, given its history of water issues that would prevent what you’ve done there to be done elsewhere?

Eric Thornburg: