Suzy Papazian - General Counsel and Corporate Secretary W.

Richard Roth - Chairman, Chief Executive Officer, President, Member of Real Estate Committee, Chief Executive Officer of San Jose Water Company, Chief Executive Officer of Sjw Land Company, Chief Executive Officer of Sjwtx Water Inc, President of San Jose Water Company, President of Sjw Land Company, President of Sjwtx Water Inc, Director of Sjw Land Company and Director of San Jose Water Company James Patrick Lynch - Chief Financial Officer and Treasurer Palle L.

Jensen - Senior Vice President of Regulatory Affairs - San Jose Water Company.

Michael E. Gaugler - Brean Capital LLC, Research Division David E. Parker - Robert W. Baird & Co. Incorporated, Research Division.

[Audio Gap] [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like turn the conference over to your host for today, Ms. Suzy Papazian, General Counsel. Please proceed..

Thank you, operator. Welcome to the Third Quarter 2014 Financial Results Conference Call for SJW Corp. Presenting today are Richard Roth, Chairman of the Board, President and Chief Executive Officer; and James Lynch, Chief Financial Officer.

Before we begin today's presentation, I would like to remind you that yesterday's press release and this presentation may contain forward-looking statements. These statements are only projections and actual results may differ materially.

For a description of factors that could cause actual results to be different from statements in the release and in this presentation, we refer you to the press release and to our most recent Form 10-K and 10-Q filed with the Securities and Exchange Commission. All forward-looking statements are made as of today, and SJW Corp.

disclaims any duty to update or revise such statements. You will have the opportunity to ask questions at the end of the presentation. As a reminder, this webcast be available until January 26, 2015. You can access the release and the webcast at the corporate website, www.sjwcorp.com. I will now turn the call over to Rich..

Thank you, Suzy. Welcome, everyone, and thank you for joining us. On the call with me today are Jim Lynch, our Chief Financial Officer; and Palle Jensen, our Senior Vice President of Regulatory Affairs.

On August 14, 2014, the long-awaited decision on San Jose Water Company's 2012 General Rate Case application was approved by the California Public Utilities Commission.

The decision authorizes rate increases of 9.8% or $22.1 million for 2013, 5.2% or $13.3 million for 2014 with the increase for 2015 to be determined in an advice [ph] letter filing in November.

The decision also authorizes San Jose Water Company to recover $46.7 million of incremental revenue retroactive to January 1, 2013, and recognizes the ongoing conservation efforts of our customers by establishing a more appropriate sales forecast.

With this decision, SJWTX's continuing growth and a fully leased portfolio in SJW Land Company, SJW's third quarter performance improved across-the-board. Quarter-over-quarter revenue was up $40.2 million or 47%. Basic earnings per share increased 332% or $1.46 compared to third quarter of 2013.

Although San Jose Water Company's General Rate Case decision was far from timely, we understand the Commission's desire for a thorough and thoughtful review of our application and we appreciate the recognition of the need for continued investments in our water system.

I would also like to express my deep appreciation to our shareholders for their forbearance during this extended rate approval process. SJWTX, our Texas water utility, continues its strong growth. Retail customers at the end of the quarter totaled approximately 12,000 from both organic growth and a recent acquisition.

Listeners may recall that, in early 2006, when we acquired the assets of Canyon Lake Water Supply Corporation, the system had approximately 4 -- 7,000 connections.

We are proud not only of the customer growth, but also the many significant improvements and investments we have made to this system, which have resulted in much more reliable and efficient water service to residential and business customers.

We strongly believe that SJW's regional business model is the most efficient, sustainable and sensible approach to ownership and operation of water utilities and that this approach will allow us to continue to prudently expand our operations to the benefit of both customers and shareholders.

I will now turn the call over to Jim who will provide you with a detailed review and analysis of the third quarter results and other financial commentary. After Jim's remarks, I will provide additional information on our regulatory filings, water supplies and other key operational and business matters..

Thank you, Rich. Net income for the quarter was $38 million or $1.88 per diluted share compared to $9 million or $0.44 per diluted share for the third quarter of 2013. Year-to-date, net income was $46 million or $2.26 per diluted earnings per share compared to $18 million or $0.89 diluted earnings per share for the first 9 months of 2013.

Net income reflects the impact of our California General Rate Case decision, the ongoing California drought and newly elected tangible property tax regulations. As Rich noted, in August, we received a final decision from the CPUC on our 2012 General Rate Case application.

The decision authorized a 9.8% revenue increase for 2013 that became effective in August and a 5.2% revenue increase for 2014 that became effective at the end of September. The decision also authorized a surcharge adjustment for the retroactive application of the newly adopted rates to January 1, 2013, the date interim rates went into effect.

The surcharges reflects [ph] actual usage compared to what was authorized in the decision for 2013 and the combined impact of 2013 and 2014 rate increases for 2014. As a result, the surcharge totaled $47 million, of which approximately $25 million relates to 2013 and $22 million to 2014.

We recognized the surcharge revenue in the third quarter, offset by approximately $3 million in balancing and memorandum accounts that were included in the decision, which we previously recognized.

We continue to operate in California under historic drought conditions and a target of 20% reduction in water use set by the State Department of Water Resources in the Santa Clara Valley Water District. As a result, water consumption for the quarter was down 12% compared to the same quarter in 2013. Year-to-date consumption was down 8%.

In the General Rate Case decision, authorized usage was adjusted downward to reflect lower forecasted demand for residential and business customers. As such, the impact of the demand decline was not as significant when comparing actual usage to authorized usage.

Also recall that effective March 31, the company established memorandum accounts with the CPUC to track the financial impact of conservation for future recovery. The memorandum account balances will be recognized by the company once the probability of recovery can be determined and timely collection is assured.

During the third quarter, we established our method of complying with capitalization elections in the tangible property regulations issued last September by the Internal Revenue Service. As a result, we extend certain assets improvement costs for tax purposes related to 2013 and prior years that were previously capitalized.

This generated a $14 million reduction in federal income taxes payable and a commensurate increase in the federal deferred tax liability. For state income tax purposes, the adoption resulted in a $4.8 million reduction in state income taxes payable and a commensurate income tax benefit.

The 2014 estimated federal and state income tax repairs and maintenance deduction will also increase under the new methodology, resulting in a decrease in federal and state taxes payable and increase in federal deferred taxes liabilities of $5.1 million and a state income tax benefit of $853,000.

Third quarter revenue was $125.4 million, an increase of 47% over the third quarter of 2013.

The increase was primarily due to the previously mentioned new rates and surcharge adjustment authorized in the 2012 General Rate Case decision and higher rates related to pass-through water cost increases from our wholesale water supplier of approximately 9%.

These increases were partially offset by lower customer usage of 7% and the impact of certain balancing and memorandum accounts of 7%. Year-to-date, revenue was $250.4 million, an increase of 19% compared to the same period in 2013. Water production expenses for the quarter were $39.4 million, a decrease of $1 million over the third quarter of 2013.

The decrease was attributable to a $4.4 million decline in usage, partially offset by $2.3 million in higher per-unit cost for purchased water and groundwater extraction charges and $1.1 million in higher expenses due to a decrease in the availability of surface water supply.

For the year, water production costs were $96 million, an increase of $4.8 million over the first 9 months of 2013. This increase was due to increased unit cost for purchased quarter and groundwater of $6.6 million and $4.5 million due to the decrease in available surface water supply. This was partially offset by a $6.3 million reduction in usage.

Operating expenses, excluding production costs, were $26.9 million in the third quarter, an increase of $1.4 million when compared to the third quarter of 2013. Higher depreciation and maintenance expenses during the quarter were offset by lower general and administrative expenses, due primarily to lower pension costs.

Year-to-date, 2014 operating expenses were essentially flat compared to 2013 due to the same factors noted in the quarterly comparisons. Nonoperating income and expense were also essentially flat when compared to the third quarter of 2013.

Year-to-date, nonoperating income and expenses included a $2 million gain on the sale of California Water Service Group stock and gains on the sale of real estate investments in Texas and California, totaling $600,000.

The effective tax rate for the 3- and 9-month periods ending September 30, 2014, was 29% and 30%, respectively, compared to 39% and 40% for the same 2 periods in 2013. The third quarter 2014 income tax expenses includes a state income tax benefit of $5.7 million related to the adoption of IRS tangible property regulations discussed previously.

Year-to-date, the 2014 income taxes also includes a credit of $880,000 related to California enterprise zone sales and used tax credits. Turning to our capital expenditure program. We added approximately $22 million in utility plant [ph] during the third quarter, bringing our year-to-date total to more than $70 million.

As of September 30, 2014, we completed 79% of our planned 2014 budgeted annual capital expenditures. In addition, for the third quarter and year-to-date, we added $2.8 million and $7.3 million, respectively, in developer funded projects. As of September 30, our gross utility plant totaled approximately $1.4 billion.

Lastly, on August 7, 2014, we closed on a $50 million 30-year senior note that requires semiannual interest payments at 5.14%. The senior note is an unsecured obligation of San Jose Water Company. With that, I'll stop and turn the call back over to Rich..

Thank you, Jim. California's challenging regulatory environment and water supply shortage will likely remain issues for the foreseeable future. Regulators, politicians and governmental agency officials continue to struggle to find balanced solutions.

In the final analysis, aging infrastructure, population growth and increasing demands on water supplies mean that greater investments will be required to provide reliable and sustainable water and water service to Californians. This, in turn, will lead to higher customer rates and increased customer interests.

We recognize our customer's interest in better understanding the seemingly illogical notion of rising rates and declining usage. They deserve clear and cogent information that explains why rates have gone up while usage has declined.

The reality is that decades of underinvestment in California's water supplies and infrastructure have now manifested itself in the form of critical, systemic water supply shortages and rapidly rising rates.

In some instances, it has been convenient and politically expedient to avoid a discussion of the real reasons for rising rates, but rather to channel this difficult issue to retail water utilities.

SJW accepts this challenge and is making the investments necessary to ensure our customers and stakeholder receive in a clear and understandable form timely and relevant information on rates, water supplies and other key issues.

We believe SJW's responsible, consistent and managed approach to investing in its water system infrastructure positions the company to successfully navigate these challenging times. We have carefully evaluated all system components and have programs in place to ensure that our vital water infrastructure remains efficient, safe and reliable.

In spite of the increased media and customer criticism directed at us, we must continue to invest prudently in infrastructure and additional water supplies. To provide customers with timely, relevant and accurate information regarding their water usage, we plan to seek CPUC approval to invest in advanced metering infrastructure.

To ensure adequate and sustainable water supplies, we are working with regional stakeholders to fast-track recycled water solutions to provide an additional drought-resistant water supply. These investments are critical to customer satisfaction and we hope that our regulators recognize the importance of addressing these issues.

In short, there has never been a greater need to communicate with customers and stakeholders about our cost structure and the investments necessary to ensure our water system remains in excellent condition.

Quickly identifying these issues and getting out in front of difficult subjects such as rates and the rates conservation nexus increases transparency and enhances our solid reputation.

To this end, SJW has established communication as a core competency and a top priority to ensuring that, on a company-wide basis, everyone understands the importance and responsibility of keeping customers, regulators and stakeholders informed.

New communication platforms and networks, including social media, are effective and efficient modalities and will be an important tool for engaging with stakeholders to provide efficient, interactive and responsive customer service in the coming years.

We have a very good story to tell, but much important work remains and we are working to ensure that our customers and stakeholder communication programs improve rapidly and substantially. Turning to regulatory affairs. The California Public Utility Commission issued its decision in San Jose Water Company's 2012 General Rate Case on August 14, 2014.

The rates for 2013 became effective on August 15, while the rates for 2014 subsequently became effective on September 29. While we were awaiting a final decision on our 2012 General Rate Case, we were busy preparing the 2015 General Rate Case application, which we expect to file in early January 2015.

On March 17, 2014, San Jose Water Company filed its first annual rate base offset for the Montevina Treatment Plant upgrades. This request was approved effective July 21 and we expect several successive annual advice letter filings to recover the roughly $62 million of total authorized project costs.

In 2013, SJWTX filed a rate case with the Texas Commission on environmental quality. On March 1, 2014, we reached a settlement agreement with the city of Bulverde.

Subsequently, SJWTX reached an agreement with customers outside the city of Bulverde and we expect the Public Utility Commission of Texas, who now has regulatory jurisdiction, to approve the settlement sometime in the fourth quarter of this year. On the water supply front.

Both California and Texas faired quite well during the peak usage months, given the extended droughts in both states. Customer demand was met through a diverse portfolio of water supplies and there is sufficient water supplies to meet the demands for the remainder of the year.

On July 29, 2014, the State Water Resources Control Board adopted new emergency regulations requiring California urban water systems to implement mandatory outdoor residential water use restrictions.

San Jose Water Company's water conservation rules, which mirror those of the State Water Board's, have been in effect since March 31, 2014, as ordered by a California Public Utilities Commission.

On August 14, 2014, the Commission provided additional guidance to its investor-owned water utilities to comply with the State Water Board's rules by requiring customer notification, monthly reporting of water usage data and coordination with local law enforcement agencies to enforce their rules.

San Jose Water Company is complying with the Commission's resolution and is working with local governments as well as the Santa Clara Valley Water District to communicate consistent conservation messages to the public.

Going forward, we expect continued variations in weather, regulatory rulings and economic conditions and we have taken and continue to take prudent steps to ensure outstanding customer service and growing shareholder value.

While it would be better for customers and shareholders if SJW could avoid large rate increases and variable results, today's announcement validates our sensible and efficient regional utility business model and earnings capability. With that, I'd like to turn the call back to the operator for questions..

[Operator Instructions] Your first question comes from the line of Michael Gaugler from Brean Capital..

Rich, your overview was pretty thorough. I've only really got one question, just kind of an expansion on some comments that you made here at the end about water supply. You indicated you're okay for the remainder of this year.

Just wondering how you're thinking about it in terms of 2015, both California and the Texas properties?.

Well, let me take the -- thank you, Michael. I'll take the easy question first. Texas, I think, is in good shape.

In spite of a continued drought there, our water supplies and our wholesale water supplier there, the Guadalupe-Blanco River Authority is in good shape and lake levels are high enough and we should have plenty of water in Texas for all of next year, all of 2015. California, it's not quite as clear.

Our water -- our wholesale water supplier, that Santa Clara Valley Water District is taking some measures and doing some contingency planning. And I think that the best we can say, Michael, is that we're good through the end of 2014. A lot of it depends on the water, how much precipitation, how much snow we -- pack we get this year and so forth.

But I do think it's a fairly serious situation in California, particularly for those entities that rely on the Bay Delta almost exclusively. And so I think it's something that you should watch, we all should watch, and of course, we're watching here and taking measures to prepare for another dry year.

But if it is another dry year, we could have even further reductions or called for mandatory rationing or mandatory conservation levels. So I think the best thing is to stay tuned and let's hope for a very wet winter here in California..

[Operator Instructions] The next question comes from the line of Dave Parker from Robert W. Baird..

There now -- hopefully got our technology issues.

Can you hear me okay?.

Yes, sir..

Congrats on a good quarter and getting a lot of things wrapped, which kind of brings me, I guess, to this question. It's with -- and a lot of -- I guess the question a lot of investors have.

With the drought that you talked a lot about, and thanks for the update, and then you needing to move right back in or back the rate -- back in the rate case cycle again.

Issues, challenges, lessons learned, any kind of revised strategy you guys could mention or highlight? And obviously, it's a difficult time just given the drought in general, but also changes at the CPUC. Any insights you can give me there would be great..

Yes, thanks, Dave. This is Rich here.

I think one of the lessons we learned is that this, as I had mentioned in my remarks, that these decades of underinvestment in water supply in California have clearly highlighted where there's a systemic construction need that all Californians need to wake up to and we need to get some -- I think we need to get some political support for some of the solutions, which are going to be costly.

So we think that there are solutions though and we think that reclaimed water and indirect potable reuse and aquifer storage and recovery programs really need to ramp up and be prioritized and that the politicians need to support us are those people in government agencies to support the pricing signals that will go with that.

And for the regulatory, to sort of answer this question, I'm going to turn it over to Palle, Dave, and let him give you a couple of remarks..

Dave, yes. As Rich has spot on, it is an issue that we continue to have to seek the support of the regulatory agencies and the political forces to get the appropriate funds to provide safe and reliable service and that, of course, is our main concern. So that will continue, obviously, in the next rate case cycle.

Procedurally, there's not much to do because the process here in California is pretty rigorous and it's just a question about adhering to the schedule and we're hopeful that this rate case we have just wrapped up will be a lesson both to us and to the regulators to make sure that we get everything in, in the appropriate time period and get reviewed in the appropriate time period because we think it's best for the customers if we get the pricing signals in place at the appropriate time and it's certainly best for the utility also.

We can continue to make the investments we need to make for safe and reliable service..

I appreciate your comments, Rich, about the education. You've got a pretty good story to tell given your experience on the water reuse and your overall cost in providing the services. As you're well aware, it stacks up very well compared to other alternatives in California.

And I'm, potentially with the governor, maybe understanding that the drought has caused for California voters this to be a key issue.

Do we -- are we getting ahead of the education kind of issue? Or does that still create a big challenge going forward?.

Dave, I think that most Californians understand that there is a structural and systemic problem. What I don't think a lot of them may perhaps agree on is what the solution should be. And for one thing, we've got to fix the Bay Delta and get that so that we can have a more reliable source out of the Bay Delta.

But I think that there's also the ag versus the urban interests and there are a lot of issues to work out and we really need some leadership in there because, in the final analysis, it's not that there's a lot of water, but there should be enough water for the urban interest to be supplied on a consistent and safe and reliable basis.

And I think there needs to be some exchange platforms where we can do that and other things.

But I think that, to answer your question more specifically, most Californians do get it, but we do need some leadership at the state level and at the local level to make sure that the investments that are getting necessary, which are going to be substantial, are made pretty quickly here and at the right pricing signals.

But I think there's a broad awareness among Californians as I think you'll find out next Tuesday when they vote on Prop 1 and 2..

There are no further questions, so now I would like to turn the call back over to Rich Roth for closing remarks..

Well, thank you, everyone. We're really pleased that we're able to report some good results here. And I think we've actually got a new platform for producing results in the future. I think we've got some usage numbers adjusted to where they need to be and maybe some further adjustments there.

But I think we're in a good place to go forward, and look forward to talking to you in January or February, I guess it is, after our Q4 results are out. Thanks..

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you very much. Have a good day..