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spk00: Good day and thank you for standing by. Welcome to the first quarter 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. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to James Lynch. Please go ahead.
spk03: Thank you, Operator. Welcome to the 2022 First Quarter 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 Andrew Walters, Chief Financial Officer and Treasurer. For those who would like to follow along, slides accompanying our remarks are available on our website at www.sjwgroup.com. Before we begin today, I would like to remind you that this presentation and 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 developments, 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 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 to 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. As a reminder, this webcast is being recorded, and an archive of the webcast will be available until July 27, 2022. You can access the press release and the webcast at our corporate websites. I will now turn the call over to Eric Thornburg.
spk05: Eric? 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. It is my pleasure to be joined on this call by Jim Lynch, Chief Accounting Officer, and Andrew Walters, Chief Financial Officer. After my initial remarks, Jim will review our financial results for the quarter that delivered 12 cents per diluted common share compared to 9 cents in the same period last year. Andrew will then discuss our California water supply status later in the call. He will also provide an update on regulatory developments and share our financial guidance for 2022. We're fortunate to lead the employees of SJW Group across all of our four states who are passionate about delivering a reliable supply of high quality drinking water and wastewater services for the families and communities that we're privileged to serve. our people continue to deliver for customers, communities, shareholders, and each other. In early 2022, we focused on laying the groundwork to deliver our 2022 financial and ESG goals successfully. Some of our achievements include reaching a settlement agreement in San Jose Water's 2022 general rate case with the Public Advocate's Office and receiving approval from the Maine Public Utilities Commission on the settlement agreement between Main Water Company and the Public Advocate's Office for the Biddeford-Sacos Division's new $60 million drinking water treatment facility. Through the winter months, we continued investing in drinking water infrastructure. Just this week, Connecticut Water filed an application with the Connecticut Public Utilities Regulatory Authority to begin recovery of $10 million in completed drinking water infrastructure projects. Andrew will discuss this later in detail. We strengthen governance around our ESG commitments through the creation of an ESG Council. The Council is made up of executive leaders, state presidents and senior managers representing ESG initiatives within the organization. It will provide the framework for the prioritization and reporting on delivery of projects, initiatives and investments as related to environmental, social and governance initiatives and we'll track our progress toward established ESG goals, such as our pledge to reduce Scope 1 and 2 greenhouse gas emissions by 50% by 2030 using a 2019 baseline. We will hold ourselves accountable to report on existing commitments and create meaningful new goals. Our ESG scores are strong. ISS rates our governance at its best rating. Among our water utility peers, We're tied for first in social and tied for second in environment. One example of our ESG commitment is our new Saco River Drinking Water Resource Center in Maine. We've set aside 250 acres of land near the facility as protected open space and conducted wetland restoration on the property. Agreements have been executed for the installation of a solar photovoltaic array that will offset 100% of the energy needs of the new facility. Development is underway for a pollinator garden and a trail for passive recreation. The facility itself was designed using the Envision Framework, a joint collaboration between the Zafnas Program for Sustainable Infrastructure at the Harvard University Graduate School of Design and the Institute for Sustainable Infrastructure. I'm also quite proud of our DEI progress. We've been successful in recruiting and retaining a diverse workforce throughout the organization. Of our 771 employees, approximately 35% of our employees are people of color, nearly two-thirds are under the age of 50, and women are about one-third of our total workforce. Our supplier diversity program has also taken root. Building on our successful program at San Jose Water, our diverse spend across all four states continues to increase with more than $55 million placed with diverse suppliers in 2021, which is 21% of our addressable spend. Great progress and our strong commitment to continue this important work. I'll now turn the call over to Jim, who will review our financial results. Jim?
spk03: Thank you, Eric. Our first quarter 2022 operating results reflect new revenues authorized in each of our four operating utilities, new customer growth, primarily in Texas, and increased customer usage when compared to the first quarter of 2021. In California, we experienced an increase in residential customer usage due to lower than normal precipitation, coupled with warm temperatures. Business usage in California was lower by 5% compared to the first quarter of 2021. In California, we continue to follow the mandatory call for conservation declared by Valley Water, our wholesale water supplier, for a 15% reduction in water use compared to 2019. Also in the first quarter, we benefited from the recognition of a property sale, partially offset by the one-time impacts of depreciation in our California concession assets, expenses related to our 2018 Billing Order Instituting Investigation, or OII, settlement and certain deferred and acquisition-related tax expense true-ups. First quarter revenue was $124.3 million, an 8% increase over the first quarter of 2021. Net income for the quarter was $3.7 million, or 12 cents diluted earnings per share, which is a 43% increase over the first quarter prior year, net income of $2.6 million, or 9 cents diluted earnings per share. The net change in diluted earnings per share for the quarter was primarily attributable to cumulative rate increases of six cents per share, new customers of three cents per share, and increased customer usage of two cents per share. In addition, we recorded a non-recurring gain on the sale of non-utility property of seven cents per share. These increases were partially offset by an increase in production costs due primarily to unit price increases of five cents per share increased depreciation of 5 cents per share, and other expense items of 7 cents per share. Our first quarter revenue increase was primarily the result of $5.2 million in cumulative rate increases, $2.5 million from new customers, and $1.8 million increase in customer usage. As Eric mentioned, we have filed a settlement on our California general rate case. We expect to receive a decision in the third quarter of 2022. Once received, we will apply the GRC decision retroactively to January 1, 2022, as provided for under our approved interim rates decision. Total 2022 first quarter water production costs increased $2.7 million compared to the first quarter of 2021. The increase was primarily due to $4.5 million in higher average per unit cost for purchase water, groundwater extraction, and energy charges, partially offset by a $1.8 million increase in surface water supply production. Andrew will talk about our surface water outlook a little later in our call. Other operating expenses increased $3.3 million, or 3% for the quarter, primarily due to $4.2 million in higher depreciation related to utility plant additions and our California concession assets. Higher administrative and general expenses of $3.3 million, primarily due to increases in labor and pension expenses and increases in maintenance and taxes other than income taxes, totaling $1.2 million. These increases were partially offset by the recognition of a $5.5 million gain on the sale of non-utility property. No similar gain occurred in the first quarter of 2021. The increase in maintenance expense reflects approximately $400,000 of expenditures on projects constructed pursuant to a settlement agreement approved by the California Public Utilities Commission on February 27, 2020, in connection with the Billing Practices OII issued by the CPUC in September of 2018. The settlement includes a requirement for the company to invest $5 million in utility plant that has not allowed an investment rate of return or rate recovery. The company's investment will focus primarily on GHG projects, specifically in the area of solar panel installations. We expect to incur $2 million of additional project costs related to the OII settlement in 2022 and the remaining balance in 2023. The effective consolidated tax rates for the quarters ended March 31st, 2022 and 2021 were approximately 22% and a negative 52% respectively. The higher effective tax rate for the quarter ended March 31, 2022 was primarily due to discrete tax expense items, including a true-up of certain deferred income taxes. Turning to our capital expenditure program, we added $43.7 million in company-funded utility plant during the first quarter of 2022. This represents 20% of our total 2022 planned capital expenditures. From a financing perspective, first quarter 2022 cash flows from operations increased 36% over the first quarter of 2021. This change was primarily the result of an increase of $6.9 million in regulatory assets, primarily due to balancing and memorandum account activities. Payments of amounts previously invoiced and accrued increased $5.2 million, and other changes increased a net of $2.8 million primarily due to funds received from the State of California water and wastewater arrearages payment program. General working capital and net income adjusted for non-cash items increased by $2.6 million. These increases were partially offset by a decrease in collections of accounts receivable and accrued unbilled utility revenue of $3.4 million and a decrease in the net collection of taxes receivable of $2.2 million. At the end of the first quarter, we had $184 million available on our bank credit lines for short-term financing of utility plant additions and operating activities. The average borrowing rate on the line of credit advances during the quarter was approximately 1.64%. With that, I will stop and turn the call over to Andrew. Thank you, Jim.
spk04: Our Board has authorized a $223 million capital spending plan for 2022. Nearly half of it is allocated to pipeline replacement projects. The plan includes budgeted investments of $115.1 million in California, $61.4 million in Connecticut, $21.8 million in Maine, and $24.5 million in Texas. The WCAG and WISC infrastructure recovery mechanisms in Connecticut and Maine, respectively, and California's forward-looking spending authorization, as well as the growth in customers in Texas, minimize regulatory lag on these infrastructure investments. San Jose Water Company's 2021 GRC application for new rates in 2022 through 2024 is pending before the CPUC. SJWC and the Public Advocate's Office filed a settlement agreement resolving all issues in the proceeding on January 13, 2022, which will be considered by the CPUC for adoption. The settlement provides a revenue increase of approximately $54 million over the three-year period, with an increase of approximately $25 million in 2022. The settlement also recognizes the need for continued investments in the water system to deliver safe and reliable water service, providing authorization of a three-year, $350 million capital budget. Additionally, it further aligns authorized and actual consumption, particularly for business customers, addresses our water supply mix volatility, and provides greater revenue recovery in the fixed charge. A decision is expected in the third quarter of 2022. With interim rates in place, we will be able to apply the rate increase adopted in the Commission's final decision retroactively to January 1st, 2022. The 2022 to 2024 cost of capital proceeding for the four large Class A California utilities is also pending before the CPUC. The application requests an increase in revenue to support a return on equity of 10.3% An adjustment to the proposed capital structure of 54.55% equity and 45.45% debt, partially offset by a decrease in the cost of debt to 5.48%. A decision is expected in the third quarter of 2022. San Jose Water's advanced metering infrastructure application is pending before the CPUC as well. An all-party settlement agreement was submitted to the CPUC for adoption that would authorize infrastructure investments of approximately $100 million over four years outside of the capital budget request in the GRC to deploy AMI. The decision is anticipated in the second quarter of 2022. In Connecticut, we filed an application with the Connecticut Public Utilities Regulatory Authority on April 26, 2022. requesting recovery of approximately 10 million in completed projects through the water, infrastructure, and conservation adjustment mechanism. If approved by PURA, as proposed, the new WICA would be effective on July 1, 2022, and would generate about $900,000 in annualized revenues. In Maine, on April 5, 2022, the Maine Public Utilities Commission approved a stipulated agreement between the company and the Office of Public Advocates that recognize all project costs, sets a 9.7% return on equity across all of Maine Waters Division, and a 6.3 million increase in annual revenues in the Biddeford-Saco Division July 1st, 2022. The settlement agreement was the second step in a multi-year rate plan that gradually raises rates for the new 60 million drinking water treatment facility in the Biddeford-Saco Division. The new facility is scheduled to go online in the coming weeks and will replace a 138-year-old treatment plant. The first step of an innovative rate smoothing mechanism that was approved by the MPEC last summer, the third step and last filing associated with the new treatment facility is expected to be in the second half of 2022. Mainwater received MPUC approval for a 3% increase in WISC effective January 1st, 2022 for its Cowhegan division. In February 2022, the company filed a rate case applications in four of its divisions. We continue to see a pipeline of growth opportunities in SJWTX, our Texas water and wastewater utility. On January 20th, 2022, SJWTX closed on the acquisition of Texas Country Water in January 2022. Overall, the company now serves more than 24,000 service connections between Austin and San Antonio and three of the five fastest growing counties in the United States, Kamal, Hayes, and Kendall Counties. SJWTX has more than tripled its customer base over the past 15 years, providing service to about 70,000 people today. with a diverse portfolio of water supplies, a growing wastewater business, and continued additions to the customer base through organic growth and acquisitions. We remain optimistic about the prospects for SJWTX and its increased contributions to consolidated earnings. The traditional rainy season in California has ended. After a promising start in late fall of 2021, we experienced unusually dry weather through the rest of the season. While drought conditions persist, the current level at Lake Ellsman with additional inflows throughout the year will likely support approximately 1.8 billion gallons in total production for 2022. As shown on this chart, Lake Ellsman is slightly above the five-year average and significantly higher than the same period of 2020 and 2021. This should bring total surface water supply production in 2022 close to or at the volume in the GRC settlement. We are announcing 2022 guidance of $2.30 to $2.40 per diluted share. Our guidance assumes CPUC approval of San Jose Waters General Rate Case Settlement Agreement, implementation of Maine Waters MPUC approved stipulation agreement for the Biddeford-Saco Division on July 1st, 2022, and completion of the four other divisional GRCs in Maine in 2022. Finally, it also assumes an equity issuance of 30 to 40 million in 2022. With that, I will stop and turn the call back over to Eric.
spk05: Thank you, Andrew. It's with deep appreciation and respect that SJW Group bids farewell to board member Catherine Armstrong, following her 13 years of dedicated service to the company. Since joining us in 2009, Catherine has guided our investments in her beloved state of Texas as well as elevated the company's commitment to the environment and community engagement. On behalf of the board and all of our employees, we wish her the very best. In summary, SJW remains an attractive investment with a focus on designing, building, and operating high-quality regional water service platforms that we believe will sustain attractive long-term returns for our shareholders. Our investments are smart and enduring, And we are confident over the long haul that the investments we have made will contribute to growth and profitability, earnings, and dividends. With that, I'd like to turn the call back to the operator for questions.
spk00: Thank you. As a reminder, if you wish to ask a question, please press star followed by one on your touchstone telephone. If your question has been answered or you wish to withdraw your question, press the pound key. Again, to ask a question, that's star one on your telephone keypad. Your first question comes from the line of Richard Sunderland with JP Morgan. Your line is open.
spk02: Hi, good morning. Thank you for the time today. Good morning. I wanted to unpack guidance a little bit and some of the assumptions there Maybe starting with cost of capital, is the debt reset contemplated in guidance, and how are you treating the ROE assumptions in there?
spk04: Richard, that's an excellent question. As it relates to the cost of capital, the debt reset is contemplated in the guidance because that's what we've asked for, so we don't expect to get anything more than we've asked for. As it relates to the ROE, Those are under ongoing discussion, so I won't comment, but we have not added anything specific to that.
spk02: Got it. And then thinking about some of the moving pieces on the quarter and how they relate to guidance as well, could you speak to, I guess, the gain on sale and the OII settlement expensing, you know, if those items are ongoing? in or out of guidance, and then I guess similarly the one-time items called out as well in the aggregate? Sure.
spk04: So I'll take that, Rich. And basically the items that we have included in our guidance include all the one-time items that have been incurred up to date. They also include the OII that Jim mentioned earlier in the call as well. So it should be reflective of everything that we know of as of today.
spk02: Got it. So that's very helpful. So just to put some numbers around this, I guess the gain on sale is $5.5 million, and then it sounds like the OII in the aggregate for 22 would be a $2.4 million offset, as well as the $0.03 of one-time items, I guess, to the positive. Am I thinking through the pieces correctly? Or maybe if you just run through the map for me, that would be helpful.
spk04: Sure, and I might also ask Jim for anything that I missed here. But first of all, starting off with the $5.4 million related to sale that is offset by, at least not in the earnings I'm talking about for the guidance, there's the $2.4 million that was related to the OII, of which $400,000 was already counted for in this first quarter. And that $0.03, so there's a remaining $2 million to be incurred for the rest of the year, and that $0.03 was the positive after the offsets for depreciation and some of the other items that Jim had highlighted in his discussion earlier. I don't know, Jim, if you want to comment on anything specifically to the other offsets.
spk03: Yeah, Richard, this is Jim Lynch. So in terms of the actual quarter, There were a couple items that were one time in nature. One was a depreciation charge that related to our lease concession in California, and then another had to do with some tax true-ups that we needed to do relative to deferred taxes. So those have been baked in both to the quarter results and the guidance that Andrew was referring to earlier.
spk02: Okay, understood. Very helpful. Maybe one last one from me. Just around the 22 equity, any sense on timing or how you expect to address that?
spk03: Yeah, you know, we have the ATM in place right now, and we're certainly going to look at the needs of the company and when they are kind of directing us towards that type of an issuance. But we'll also be watching the market. We want to make sure that When we do raise that equity, it's at a time when the stock is performing at a high level and a comfortable level. So we have some flexibility in terms of the timing there.
spk02: Okay, great.
spk05: I appreciate the call today. Thank you. Thank you, Richard. Appreciate the questions.
spk00: Next question comes from the line of Hassan Doza with Water Asset Management. Your line is now open.
spk01: Good morning, gentlemen. A couple of questions. The first is I heard your commentary about the water purchase or storage embedded in the new GRC settlement. That makes sense, the 1.8 billion gallons. That I understand, but my question is currently before the new GRC is implemented because the decision probably comes out in the third quarter, but obviously we are going to be in the summer beforehand. And if I'm not mistaken, currently in your rates, the amount of gallons embedded is about 2.5 billion gallons, not 1.8. So my question is, before the GRC is implemented in the summer, how much water do you expect to purchase in thousands or millions of gallons relative to the existing threshold that's in your rates, which I believe is 2.5 billion gallons? That's my first question.
spk04: Can I just make sure I understand your question for Jim, too? Are you asking for what next quarter's purchase of water is going to be specifically before we come to a final decision potentially by the end of the quarter? Well,
spk01: In the event of any delays in the CPUC, there's no guarantee when the CPUC will have a decision. But you will be, am I right? I mean, the CPUC decision could move one month, two months, whatnot. What I'm trying to understand is, forgetting about the new GRC, because we don't have real visibility on the timeline, that could shift. What I'm trying to understand is, Based upon your available water storage, do you have a plan as to how much water you're purchasing going into the summer? That's kind of the essence of the question. How many thousands or billions of gallons do you expect to purchase, you know, in the next three, four months going into the summer?
spk05: Thanks, Hasan, for your question, and the clarity helps. We don't forecast that. We haven't disclosed any numbers on that. But I think what's most important is that the settlement agreement includes a full cost balancing account for water supply. And if approved, that would be retroactive as well to January 1. So we've successfully negotiated a reduction in our supply mix from the $2.5 billion of our own surface water production to the 1.8, which we believe is really beneficial to our shareholders, but also to our customers, because in the years in which we do have abundant rainfall and even perhaps just slightly above normal, then anything, you know, there would be a balance between shareholders and customers reflected. So we're really ultimately would be agnostic as to, you know, what that water supply number was. as a result of the settlement. So that's the best way to think about that, is that it will be reflected back to January 1.
spk01: Okay. My two remaining questions. The second one is, what is the tax rate assumed in the guidance? Because I know the first quarter tax rate is a little bit hard to understand, so I'm just trying to understand kind of a normal tax rate for the year and what's kind of embedded in the guidance. That's my Second question on tax rate.
spk04: Sure. Hasan, we typically don't necessarily forecast all the details around the tax rate because there are often a lot of different moves throughout the year, but we're at 16% in our forecast for now.
spk01: Got it. And my final question, just as a follow-up to the first question where you were answering the gain on sale and the other one-time items, my quick math as I was following your answer, it comes out to about $0.10. You have about 30 million shares outstanding, roughly speaking. Is that a fair ballpark estimate in terms of if I add up the gain on sale of $5 million, then subtract the $2 million net OII and a couple of the other depreciation items, I get to about a $0.10 positive impact from those items. Is that a fair ballpark calculation? And if not, what is the right EPS estimate? Specifically one-time items.
spk03: Yeah, so on the one-time items, there was also, as I mentioned, a deferred tax estimate. item that was driving the tax rate up above the 16% that Andrew just mentioned to 22%. We did state both in our earnings release and on the call this morning that the one-time items basically netted to a $0.03 delta and that from a recurring basis we were at a $0.09 as compared to $0.09 in the prior year. Also, I would remind you of the the statements that we made earlier on our call that the rate case in California has not been baked into the results in the current year. So we are experiencing 2020 expenses and increases related to 2022. I should say 2022 expenses and the increases related to our operations that occurred in 2022 without having the income recovery from that. So That's how I'd kind of think about one where we wound up in the first quarter and what we will be looking at as we move into the second quarter.
spk04: And, Hasan, just to kind of make it very easy to think through it, if you take the three cents that Jim talked about and then you also talk about the ongoing $2 million from the OII, that's what you would look at from what's been done to what's included in our guidance. So all the one-time items are already included, plus an additional $2 million is included for the OII.
spk01: Okay. Thank you, everyone. Appreciate it.
spk04: You're welcome. Thank you, Hassan.
spk00: Again, to ask a question, please press star followed by 1 on your touchtone telephone. Your next question comes from Jonathan Reeder with Wells Fargo. Your line is open.
spk06: Hey, good morning. I guess I'll try to ask Hasan's last question just a little differently. What would the 230 to 240 guidance range be if you just exclude all the one-time items that are known and or anticipated throughout the year?
spk03: Go ahead, Tim. I would suggest that you would take the three cents away to get it to the nine cents for the quarter. If you take a look at for the year, you would add back the $2.4 million on the OII cost of capital. So that would be adding back an additional roughly, I'm going to say $0.03 for ease of discussion. So it would be right around the $2.43, $2.44, $2.45 range.
spk06: on the upper range and and the same on the lower range add add roughly three to four cents okay um and then i guess i'm confused the 5.5 million dollar gain like that how does that translate into only seven cents like that's 18 cents on a pre-tax basis I believe.
spk03: Yes. So, in that particular part of the discussion, we're referring to a comparison between the prior year and the current year, and that comparison is done on an earnings per share basis. So, recall that we had a pretty big swing in taxes, and so that's showing what the actual tax impact was to that 14 to 15 cents pre-tax per share gain. Or item, I should say, not gain. Gain.
spk06: Okay. And then I guess the last question, I guess, I think you kind of already answered this, but the nine cents from continuing ops, that doesn't reflect any assumed benefit from the pending GRC settlement, right? That's correct. Okay. Any way to tell us how much that would have added if we would assume that's in there?
spk04: You know, it's a great question. If you look at it, it obviously depends on the allocation through the year, but I would add from a revenue perspective approximately $4 million. The key to focus on is you've got 25 for the year, and it's just based off the allocations, but based on where we are, it would be about a $4 million add. Okay. All right. Thank you. Appreciate it.
spk00: There are no further questions at this time. Presenters, do you have any closing remarks?
spk05: Yes. Thank you, operator. Thank you, all of you, for joining our call today. We really appreciate your interest and support of San Jose Water Company and SJW Group. We look forward to keeping you updated on our progress throughout the year. And, again, thank you very much for participating in our call today.
spk00: that concludes today's conference call thank you all for your participation you may now disconnect
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