H2o America Q1 FY2025 Earnings Call

Ladies and gentlemen, thank you for being here. Welcome to the SJW Group First Quarter 2025 Financial Results Call. Currently, all participants are in listen-only mode. After the presentation, there will be a question-and-answer session. Please note that today’s conference is being recorded. Now, I would like to hand it over to Ann Kelly, Chief Accounting Officer. Please proceed.

Thank you, Mitchell. Welcome to the first quarter 2025 financial results conference call for SJW Group. I will be presenting today with Eric Thornburg, Chair of the Board, President and Chief Executive Officer; Andrew Walters, Chief Financial Officer and Treasurer; Bruce Hauk, Chief Operating Officer and Kristen Johnson, Senior Vice President and Chief Administrative 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 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. This webcast is being recorded, and an archive of the webcast will be available until July 21, 2025. You can access the press release and the webcast at SJW Group's website. In addition, some of the information discussed today includes 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 Andrew.

Thank you, Ann. Welcome, everyone, and thank you for joining us. I am honored to serve as Chief Financial Officer and Treasurer of SJW Group. And I'm looking forward to becoming the Chief Executive Officer following Eric Thornburg's planned and well-deserved retirement on July 1. I want to add my sincere gratitude to Eric for his leadership and fellowship over the years. I look forward to continued partnership with Bruce, Kristen, Ann and Willie and my colleagues at SJW Group, as we chart our course for a journey of continuous improvements and excellence through servant leadership. I'm pleased to share that in the first quarter of 2025, 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 41% increase in net income from the first quarter of 2024 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 from the first quarter. San Jose Water's 2025 to 2027 general rate case was delivered on time and was effective on January 1. Connecticut Waters, water infrastructure and conservation adjustment and water revenue adjustment filings were approved. Maine Water's petitioned to unify our 10 different rate districts and our rate case for the Camden Rockland division are progressing before the Maine Public Utility Commission. Texas Water's second system improvement charge applications before the Public Utilities Commission of Texas. In quarter one, $78 million was invested in water and wastewater utility infrastructure across all 4 states, and we are on track to meet our 2025 capital plan. Importantly, we continue to create long-term shareholder value with earnings per diluted share of $0.49 and adjusted non-GAAP earnings per diluted share of $0.50 in the first quarter. And as you will hear later, we remain laser-focused on operating efficiency. And we recognize colleagues at each local operation for their contributions to our safety culture. As expected, 2025 looks to be a strong year for SJW Group, as we build on our foundation for sustained growth and long-term value creation and I want to thank our talented team across the nation for making that happen. The completion of successful general rate cases in our 2 largest jurisdictions in 2024 has reduced potential regulatory risk for the next couple of years. These 2 states generated 90% of our water utility services net income in 2024. Our 2025 capital plan is a 34% increase over 2024 actual spend. We don't foresee any significant issues from current US economic conditions. The vast majority of our supplies are domestic with some used components and materials from other countries. The leadership transition Eric announced last quarter is progressing smoothly. Our new team is complete with the exception of a new Chief Accounting Officer to assume Ann's duties as she becomes our new Chief Financial Officer effective July 1. Kristen will also share details about the newest impactful leader who just joined our team last week. Our long-term growth strategy beyond 2025 will continue to focus on timely recovery of a robust $2 billion 5-year capital plan that is needed to maintain reliable service and high-quality water, as well as solid regulatory relationships that are built on outcomes that serve customers and capital providers. While not in our baseline growth plan, we will continue to pursue opportunistic acquisitions that benefit our customers and make financial and strategic fit. We will do that with a focus on financial discipline and a steadfast commitment to affordability. We are leveraging our scale, operational efficiencies and technological advancements to manage costs, while providing for our systems to remain robust, resilient and reliable. As evidence of our financial discipline, S&P raised the credit outlook for SJW Group to stable. We will continue to focus on important credit metrics, as we are committed to maintaining our A category credit rating. We will discuss all this in more detail later in the call. But for now, let me turn the call back to Ann to take you through our financial results.

Thank you, Andrew. Yesterday, after the market closed, we released our first quarter operating results. As Andrew mentioned, we are pleased to report $0.49 of GAAP diluted EPS and $0.50 adjusted diluted EPS for the first quarter. With these strong first quarter results, we are affirming our 2025 guidance range of adjusted diluted earnings per share of $2.90 to $3. We are also affirming SJW Group's 5% to 7% earnings growth rate through 2029, and we expect to be in the top half of the range. Turning to Slide 9. In the first quarter, we reported revenue of $167.6 million, a 12% increase over the $149.4 million reported in 2024, primarily reflecting the rate increases in California and Connecticut that Andrew referred to. This increase in sales along with prudent cost management resulted in GAAP net income of $16.6 million, which increased 41% over 2024 and adjusted net income was $16.7 million, a 43% increase over the prior year. We also reported a 39% increase in our adjusted diluted EPS of $0.50. The factors impacting 2024 earnings per share are shown on Slide 10. At a high level, increased revenue from rates and usage drove a revenue increase of $0.41. The revenue increase was partially offset by higher water production expense of $0.16, other operating expense of $0.06 and an increase in interest expense of $0.02 and an additional $0.02 due to an increase in the number of shares outstanding. Turning to the next slide, I'll provide more detail on each of these areas. As I mentioned earlier, our revenues increased 12% in the first quarter. Rate increases from the general rate cases in California and Connecticut, along with increases from our infrastructure mechanisms in Connecticut, Maine and Texas contributed $11.9 million to the revenue increase. $5.3 million is attributable to pass-through water costs for our wholesalers as these costs continue to increase each year. Higher customer usage added another $1 million as increased usage in California more than offset a reduction in Texas due to the increasing severity of the drought. And revenue increases associated with new customer growth was offset by a reduction in regulatory mechanisms. With the new rate case in effect in California and lower authorized usage, we would expect regulatory mechanisms to be less pronounced in the current rate structure. Water production expenses increased 14% in the quarter and was primarily driven by an increased cost of $5.6 million from our water wholesaler. However, these costs are largely offset in revenue and $2.4 million in expense associated with higher production volumes. For the quarter, we reported a 4% increase in other operating expenses. General and administrative expenses increased by $2 million, primarily driven by customer credit losses and insurance costs, along with an $800,000 increase in maintenance costs and $200,000 of other cost increases. On the financing side, in the first quarter, we raised approximately $27 million of our $120 million to $140 million expected annual equity proceeds through our at-the-market program, or ATM. At the end of the quarter, we had $153 million drawn on our $350 million bank lines of credit, which left $197 million available for short-term financing of utility plant additions and operating activities. We were also pleased to see that the average borrowing rate for our line of credit advances in the first quarter was approximately 5.47% compared to 6.54% in the prior year. And on the tax front, consolidated income tax rates were pretty steady quarter-over-quarter with a 1% increase in our effective tax rate, primarily due to higher pre-tax earnings. Turning to Slide 15. In addition to affirming our long-term growth rate and EPS guidance mentioned earlier on the call, we are also affirming equity issuances of $120 million to $140 million planned through our ATM, excluding any acquisition growth and our $473 million capital plan in 2025. We are now seeing construction activity pick up with the return of warmer weather, especially in Connecticut and Maine. And lastly, I'd like to take a moment to reiterate our long-term targets. We are affirming our 5% to 7% long-term growth rate and continue to expect to be in the top half of the range. We have established a robust five-year $2 billion capital plan, and we continue to focus on our credit metrics with a target FFO to debt of 12% by 2028, which will give us 100 basis points of cushion over our 11% downgrade threshold from S&P. And with that, I will turn the call over to Bruce to discuss the state updates.

Thank you, Ann. As Andrew mentioned earlier, new rates have been implemented for San Jose Water starting January 1, 2025, as planned. The new rates facilitate $450 million in capital spending for the three years associated with this general rate case and a total revenue increase of $53.1 million or 9.4% based on the authorized sales and customer forecast for 2025 through 2027. We will also see improved revenue recovery through the service charge, now at 48%, along with better alignment of authorized actual usage due to a lower sales forecast. The approved rate increase for 2025 is $21.3 million or 3.91%. The annual increases for 2026 and 2027 will be $14.4 million and $17.4 million, respectively. I also want to highlight that our ongoing advanced metering infrastructure project is distinct from the GRC capital plan. This AMI project is budgeted at $100 million, with most expenses expected in 2025 and 2026. The costs for this project will be recovered through annual rate base offset filings with the California Public Utilities Commission, effective July 1. We plan to file for recovery in May 2025, with rates taking effect in July 2025, and I will provide more details during the second quarter call. Moving on to Connecticut, last month, the Connecticut Public Utilities Regulatory Authority approved a $1.6 million revenue increase related to the company’s water infrastructure and conservation adjustment, effective April 1. The cumulative WICA surcharge is now 4.9%. PURA also sanctioned Connecticut Water's proposed annual reconciliation related to the 2024 revenue shortfall. This adjustment reconciled the 2024 revenues as authorized in Connecticut Water's June 2024 general rate case, allowing for recovery of an additional $627,000 due to meeting performance metrics established by PURA in the 2024 GRC decision. This amount is prorated and applies only to the period from July 1, 2024, to December 31, 2024. The full-year performance-based revenue potential is about $1.1 million. Connecticut Water has applied for approximately $19.4 million in loans from the drinking water state revolving fund to support improvements to the water system and a lead service line identification program. The authority issued a proposed final decision on April 11, 2025, approving our request, with a final decision anticipated soon. Utilizing lower interest loan programs when beneficial is another way we strive to keep costs manageable for our customers. We are also collaborating with state lawmakers and regulators on a water quality and treatment adjustment mechanism, which would allow for cost recovery associated with water treatment and remediation infrastructure between general rate cases. Should it be enacted, it would help mitigate rate impacts related to PFAS compliance, distributing costs more evenly over time. The bill has passed out of committee, and we expect a decision on the WQTA by the time the Connecticut legislature closes on June 4. In Maine, our petition to unify the company’s 10 different rate districts into a single tariff is currently before the Maine Public Utilities Commission. If approved, this will simplify general rate case and water infrastructure charge applications, which are now addressed on a district basis. A decision is expected in the fourth quarter of this year. Our general rate case for the Camden Rockland division is also under consideration by the PUC, where we are requesting a revenue increase of $1.1 million or 15.9% above the current authorized revenue. A decision on this is anticipated in this quarter. In Texas, we are facing significant and ongoing drought conditions. As we discussed during our last call, we're employing a multi-faceted strategy to enhance the resilience of our Texas water systems against extreme weather, which will improve the reliability of our water supply for current customers. Our top priority is to bring online 6,000 acre-feet of water supply from our KT Water acquisition to serve customers by the end of 2026. This is a phased, multi-year project requiring around 6 miles of transmission main, along with storage and pump stations. This initiative represents a substantial investment, which is reflected in our capital budget. Regarding regulatory matters, Texas Water's second system improvement charge application is currently under review by the Public Utilities Commission of Texas. We have requested $4.1 million in revenue, and a hearing was held last month; a decision could come as soon as this quarter. With that, I will turn the call over to Kristen.

Thank you, Bruce. Turning into slide 22. As Bruce mentioned, our capital investments are increasing to meet higher water quality standards and evolving customer expectations. At the same time, we know affordability is essential. Our customers don't have unlimited resources, and we're committed to ensuring every dollar we invest delivers maximum value. That's why we're laser-focused on efficiency, scrutinizing every aspect of our business to ensure we're operating as effectively as possible. By leveraging our national scale and optimizing operations, we're creating the financial flexibility needed to support these critical investments, while helping to moderate future rate increases. One of the biggest opportunities to improve efficiency is through business transformation. As we continue to enhance our operations, we are investing in standardized enterprise-wide platforms to drive efficiencies, improve service and support long-term growth. A key part of this effort is to transition to a unified customer service system, which will mean faster, more efficient service for customers, a more resilient workforce, where employees can support operations across different locations and ultimately improve service reliability. And as you heard earlier, we're investing in Advanced Metering Infrastructure in San Jose and the majority of our customers in Texas are already experiencing the benefits of this technology. AMI will reduce operating costs, improve billing accuracy, enhance leak detection and generate long-term savings for both our customers and our company. We are currently considering the development of AMI in Connecticut and Maine. These technology advancements aren't just upgrades; they're part of our broader strategy to drive efficiencies that translate directly into cost savings for customers and long-term system resilience. A strong execution strategy requires strong leadership and we continue to build a world-class team. Last week, we welcomed another highly accomplished leader to SJW Group. Ken New is our new Chief Human Resources Officer. She joins us from Avangrid, where she recently served as Vice President of Rewards and Employee Experience. Ken brings deep expertise in human resources, and I know she'll make a positive impact on our people and our culture. And with that, I'll turn the call over to Eric.

Thank you, Kristen. We continue to prioritize building a culture of safety, because protecting our people and the communities we serve is foundational to everything we do. Whether our employees are in the office, in the field or at a construction site, we want them to return home safely each day. And we want the public to feel confident that the work we do is being done with care, integrity and safety top of mind. Safety isn't just a checklist. It's really a mindset. And when your team understands how essential water is to the health and strength of the community, it can be tempting to jump in and solve problems quickly. But we know, that doing things the right way sometimes means slowing down, assessing risk and putting safety first. In March, our State President of National Leadership Team recognized four employees whose actions protected co-workers, contractors and community members alike. These included exercising Stop Work Authority, requiring contractors to follow safety tailboards and taking the time to educate others on the consequences of unsafe practices. As I close my final earnings remarks as CEO, I want to express how proud I am of this team; the care you bring to your work each day, your integrity, your discipline and your heart is what makes this company special. We talk often about our purpose to protect what's precious. That means water, yes, but it also means people, our employees, our customers and the communities who count on us every single day. And now, I'll turn the call back over to Michelle for questions.

Thank you. And the first question is going to come from Richard Sunderland with JPMorgan Securities. Your line is now open.

Hi. Good morning. Can you hear me?

Yes, we can Richard. Thanks for joining us today.

Great. Thanks Eric. And best of luck with the retirement here. I know it's not quite the end for you yet, but the last earnings call, so best of luck.

Yes. Thank you, brother. I appreciate that very much.

So just trying to unpack the results a little bit and thinking about both revenue uptick on the quarter and I guess the Texas drought impacts to the business as well. Are you able to frame kind of where you're trending relative to guidance for the year? Is this a matter of kind of the rate impacts, particularly California and the fixed charge there? And is there any offset to Texas? Or are you trending kind of ahead in any areas? Thank you.

Yes, I'll take that. Thanks. I would say we are trending right on plan for this year and in connection with our guidance, so still expect to be in the $2.90 to $3. A couple of things just to talk about this year versus being some other quarters. As you mentioned, we do have full year rate cases. So for California and Connecticut, we both have a full year starting in Jan 1. So that is helpful. We do have a little bit more front-loading this year compared to previous years. The WCMA, which is the adjustment mechanism in San Jose, does have some volatility with it doesn't exactly follow the trend of our revenues, but we do expect it for the full year to come in line with plan. And then when you think about 2023 and 2024, there were some variability between the quarters, especially related to some tax adjustments for the tax accounting method changes and some release of uncertain tax reserves. So you wouldn't expect those to happen this year. So just to summarize, we're on track and expect a great year.

And Ann, as I recall, when we built the business plan for 2025, we did assume that Texas would remain in drought. Is that correct?

We did assume some level of drought for this year, yes, you're right.

Correct. Thank you. Thank you, Richard.

Understood. And then the WQTA opportunity, could you speak a little bit about what the earnings impact of that mechanism might be, how it could impact regulatory strategy in the states? Any other thoughts or considerations? Thank you.

Thank you, Richard. I'll start with Bruce, and then I'll ask Ann to make some comments as well.

Thank you, Richard. As I mentioned earlier, the WQTA has advanced through a committee, and we are optimistic that it will be finalized by June 4 of this year. This mechanism will closely resemble our current WICA-like mechanism in Connecticut, but it will focus on the necessary environmental improvements from a capital perspective for recovery. To put this in context, we invested over $130 million in Connecticut and an additional $110 million in California. We anticipate that the $130 million will be recouped in future filings classified as WTTA filings. Therefore, when examining the overall capital situation, this approach significantly reduces the regulatory lag that would have been present without a recovery vehicle other than a general rate case. It streamlines the improvement process, enhances recovery, and improves our regulatory timelines for returns.

And I don't expect that this would have an impact on 2025, but rather reducing the regulatory lag in the outer years?

Bruce, can you refresh my memory on that? Is there a percent cap on the bill currently anticipated? I don't recall.

There was a cap set at 15%. Obviously, things can change in a regulatory process, but we are hopeful that this will continue to go through as was approved through committee. To put that in perspective, our WTTA mechanism has a 10% cap.

Operator, are there any other questions for the leadership team here?

Yes. One moment, please, for the next question, and that comes from Angie Storozynski with Seaport. Your line is open.

Thank you. Congratulations Eric and to all of you guys, actually. So, just one question. So Andrew, you keep talking about potential M&A or you willing necessarily acquire assets. And I'm just wondering, do you have any state in mind? It's not actually easy to find the sizable water or wastewater assets that would be available for sale in your core states?

Angie, it's an excellent question. And I would start off by saying is that there are opportunities within the states that we operate in, and particularly the state of Texas is a place that we have had a number of successful acquisitions close with a very positive impact on our business. So that is a prime area that I would expect to see continued activity. In addition to that, we are expanding our views in California. Connecticut may be more restrained on certainly the big opportunities, but there are some additional smaller opportunities that we will continue to work on as well as in Maine. As for other states, we always remain open to other states. As you highlighted, it's not like you just go to the grocery store and you pick a water company off the shelf; they are something that comes by from time to time. But that being said, there are still a number of solid opportunities out there for a company our size to be able to look at and engage in, and I would expect us to continue to do that as time goes on. So, I think the key that we stay focused on, though, Angie, is making sure that we deliver the financial results and that the accretion happens in the timeframe as well as the leverage does not go beyond what our stated goals are.

Very good. That’s all I have. Thank you.

Thank you, Angie.

I show no further questions in the queue at this time. I would now like to turn the call back over to Eric Thornburg for closing remarks.

Thank you again for joining us today. The first quarter was really strong for SJW Group, and we have even more to look forward to in the rest of 2025. We remain committed to investing in infrastructure and exploring solutions to maintain affordability as capital needs continue to grow in the water industry. SJW Group proudly leverages our national platform to support our distinct local operations, all united by a shared mission, delivering reliable service and high-quality water to 1.6 million people across four states. At the same time, we continue executing our growth strategy and delivering shareholder value, including our unwavering commitment to the dividend, which we paid for more than 80 consecutive years. Our success is built on a culture of service to our customers, communities, the environment and shareholders, and I couldn't be prouder of our team whose dedication makes it all possible. This is my last financial results call as President and CEO of SJW Group. It's been an honor of my lifetime to serve in this industry for more than 43 years and I've been blessed with a very talented group of people surrounding me here at SJW Group. I have great confidence that Andrew, Bruce, Kristen and Ann and the rest of the highly motivated and passionate teams across the country will build on the solid foundation that we've laid to continue delivering for customers, employees, communities, shareholders and the environment. Andrew, Bruce, Kristen and Ann are always available for follow-up. As for me, I'll be around until June 30. We appreciate your interest and trust in SJW Group. God bless.

This concludes today's conference call. Thank you for participating. You may now disconnect.