SJW Group (SJW) Q3 2024 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The financial performance shows growth in revenue and net income, but increased expenses and borrowing rates raise concerns. The Q&A highlights potential risks in Texas sales and Maine's tariff consolidation. The acquisition interest in Aquarion adds uncertainty. Strong financial metrics are countered by cautious guidance. The market reaction is likely neutral due to mixed signals and lack of decisive positive catalysts.

Key Financial Performance

Revenue $225.1 million, a 10% increase from $204.8 million in Q3 2023, driven by rate increases and higher pass-through water costs.

Net Income $38.7 million, a 7% increase from $36.2 million in Q3 2023, reflecting strong financial performance.

Diluted Earnings Per Share (EPS) $1.17, compared to $1.13 in Q3 2023, indicating improved profitability.

Adjusted Net Income $39 million, with adjusted diluted EPS of $1.18, excluding merger and acquisition expenses.

Year-to-Date Revenue $550.6 million, a 10% increase from $499 million in the same period of 2023, primarily due to rate increases.

Year-to-Date Net Income $71 million, an 8% increase from the previous year.

Year-to-Date Diluted EPS $2.18, compared to $2.09 in 2023.

Water Production Expense Increased by 16% compared to Q3 2023, driven by rate increases from water wholesaler and higher production volume.

Total Other Operating Expenses Increased by 8% year-over-year, primarily due to higher maintenance, administration, and general costs.

Average Borrowing Rate 6.53% year-to-date through September 2024, compared to 6.16% in the same period of 2023.

Effective Consolidated Income Tax Rate Approximately 5% for Q3 2024, down from 11% in Q3 2023.

Gross Equity Proceeds $65 million raised year-to-date through the at-the-market equity program.

Bank Lines of Credit $93 million drawn on $350 million available, leaving $257 million for short-term financing.

Long-term Debt Raised $125 million raised in Q3 2024, primarily to pay down bank lines of credit.

Capital Expenditure Plan $252 million invested year-to-date, approximately 76% of the $332 million plan for 2024.

Five-Year Capital Investment Outlook $1.6 billion, including approximately $230 million for PFAS remediation.

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Operating Highlights

New Agreement with Cupertino: San Jose Water reached an agreement with the City of Cupertino, California, to manage the city's water system effective October 1, 2024, with a 12-year initial term and a $22.1 million upfront concession fee.

GRIP Grant: SJW Group anticipates receiving an $8 million grant through the Grid Resilience and Innovation Partnerships program for clean energy infrastructure, matching that amount for a total investment of $16 million.

Maine Tariff Consolidation: Maine Water intends to file a petition for consolidation of tariffs across its 10 rate districts to streamline regulatory processes.

Texas System Improvement Charge: Texas Water filed for a second System Improvement Charge requesting a $4.3 million increase in annual revenues for completed infrastructure projects.

Capital Expenditure: Year-to-date, SJW Group has invested $252 million, or 76% of its $332 million capital expenditure plan for 2024, focusing on water and wastewater utility infrastructure.

PFAS Remediation: SJW Group maintains a five-year capital investment outlook of $1.6 billion, which includes approximately $230 million for PFAS remediation.

Rate Case Settlement: A settlement agreement with the California Public Utilities Commission for San Jose Water's 2025-2027 general rate case includes a $450 million capital expenditure budget and a 9.4% total revenue increase.

Acquisition Interest in Aquarion: SJW Group remains interested in acquiring Aquarion, with a potential announcement of the successful bidder expected by the end of 2024.

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Risk or Challenges

Regulatory Challenges: The company faces significant challenges in meeting new water quality standards and replacing aging infrastructure while maintaining affordability for customers. Regulators and policymakers expect the company to find efficient solutions to balance these competing needs.

Competitive Pressures: The company is under pressure to optimize operational efficiency and maintain competitive pricing while investing in infrastructure and addressing emerging contaminants.

Supply Chain Challenges: The company is experiencing increased capital investment requirements due to new regulations, such as the EPA's Lead and Copper Rule, which may impact future capital expenditures.

Economic Factors: Drought conditions in Texas are affecting water usage and conservation measures, which may lead to lower revenue projections for 2024 and beyond.

Financial Risks: The company has raised $125 million through long-term debt offerings, and the average borrowing rate has increased to approximately 6.53%, which could impact future financing costs.

Customer Affordability: The company is focused on maintaining affordability for customers amidst rising operational costs and regulatory compliance expenses.

Merger and Acquisition Risks: The company is interested in acquiring Aquarion, but community concerns regarding tax revenues and customer rates may influence the acquisition process.

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Guidance & Outlook

Capital Expenditure Plan: Year-to-date, SJW Group has invested $252 million, or approximately 76% of its $332 million capital expenditure plan for 2024, focusing on water and wastewater utility infrastructure across all four states.

Five-Year Capital Investment Outlook: SJW Group maintains a five-year capital investment outlook of $1.6 billion, which includes approximately $230 million in estimated PFAS remediation.

Settlement Agreement with CPUC: A settlement agreement has been filed with the California Public Utilities Commission for San Jose Water's 2025-2027 general rate case, which includes a $450 million capital expenditure budget.

GRIP Grant: SJW Group anticipates receiving an $8 million grant through the Grid Resilience and Innovation Partnerships program, matching it for a total investment of $16 million.

Acquisition of Cupertino Water System: San Jose Water reached an agreement to manage Cupertino's water system, effective October 1, 2024, with an upfront fee of $22.1 million and annual payments of approximately $1.8 million.

2024 GAAP EPS Guidance: 2024 guidance for GAAP is currently at $2.65 to $2.75 per diluted share.

2024 Non-GAAP EPS Guidance: Reaffirmed guidance of $2.68 to $2.78 per diluted share on a non-GAAP basis.

Long-Term Growth Rate: SJW Group reaffirms a long-term growth rate of 5% to 7%, anchored off the 2022 diluted earnings per share of $2.43.

Debt Financing Plans: By the end of 2024, SJW Group plans to raise an additional $35 million in long-term debt to pay down its line of credit.

Revenue Increase from Rate Cases: The settlement agreement includes a $53.1 million total revenue increase for the 2025-2027 period, with annual step increases between approximately 2.6% to 3.9%.

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Shareholder Return Plan

Dividend History: SJW Group has paid a dividend for 80 consecutive years and has raised that dividend for 56 consecutive years.

ATM Program: $65 million in gross equity proceeds raised year-to-date through the at-the-market equity program (ATM), which is set to expire on November 17.

Concession Fee: San Jose Water will pay an upfront concession fee of $22.1 million to manage the City of Cupertino's water system.

Capital Expenditure Budget: The settlement agreement authorizes a $450 million capital expenditure budget for addressing key needs such as PFAS treatment and greenhouse gas emissions reduction.

Revenue Increase: The settlement agreement includes a $53.1 million total revenue increase at the 2025 through 2027 authorized sales and customer forecast.

Annual Step Increase: The annual step increase in revenue is projected to range between approximately 2.6% to 3.9%.

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Key Q&A

Q:Can you speak a little bit about the sales in Texas relative to the 2024 guidance assumptions? Are they on track, ahead, or behind?

A:We've definitely suffered some decreases due to usage and conservation in Texas this year. We are not adjusting our guidance range due to that.

Q:How do the usage trends and recent developments position you on a 2025 basis relative to the 5% to 7% long-term growth rate?

A:For 2025, we expect the drought conditions to persist, but we will have the benefit of the settled rate case and the full year of the Connecticut rate case.

Q:How long could the Maine tariff consolidation process take, and would it require a rate case after approval?

A:It's still early days to comment on rate levels, but this is a huge strategic move for our company to get this onto one rate cycle.

Q:What updates can you offer on Aquarion, your interest in the assets, and potential timeline?

A:Eversource announced they were looking to sell Aquarion, and we remain interested in the assets. We expect to know the successful purchaser by the end of the year.

Q:Is there any avenue for the CPUC to lower the allowed ROEs for water utilities in 2025?

A:At this time, we have no indication that a similar change is contemplated for the water utilities.

Q:What is SJW's potential cost of capital strategy for 2025?

A:The odds are likely that we will end up filing in 2025, but it depends on the commission's workload.

Q:Any potential impacts on the CapEx budget from the EPA's recently finalized Lead and Copper Rule?

A:We are seeing continued increases in capital investment requirements, and we will provide a revised five-year forecast in the next quarter.

Q:Why do you still keep your non-linear growth profile comments if California is smoothed out?

A:We still have two big divisions and one smaller division, so non-linear growth will still happen.

Q:Do you have any exposure to data centers and the growth in water demand that they might have?

A:I wouldn't expect to see significant volumetric changes from data centers, but there would be infrastructure demands around that.

Q:Review of Unclear Management Responses

A:Management appeared to avoid giving a direct answer regarding the specific timeline for the Maine tariff consolidation process and the potential impacts on the CapEx budget from the EPA's Lead and Copper Rule, as well as the exact nature of the growth profile in California.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

SJW Transcript

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SJW Report

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