Suzy Papazian - General Counsel & Corporate Secretary Eric Thornburg - CEO, President & Director James Lynch - CFO & Treasurer.

Michael Gaugler - Janney Montgomery Scott.

Good day, ladies and gentlemen, and welcome to the SJW Group Q4 2017 Financial Results Conference Call. [Operator Instructions]. And I would now like to introduce your host for today's conference, Ms. Suzy Papazian, General Counsel. You may begin..

Thank you, Operator. Welcome to the Full Year and Fourth Quarter 2017 Financial Results Conference Call for SJW Group. Presenting today are Eric Thornburg, President and Chief Executive Officer; and James Lynch, Chief Financial Officer.

For those who would like to follow along, slides accompanying these remarks are available on our website at www.sjwgroup.com. Before we begin today's presentation, 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 development 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 statement.

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 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 at www.sjwgroup.com.

All forward-looking statements are made as of today and SJW Group disclaims any duty to update or revise such statements. You'll have the 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 April 23, 2018.

You can access the press release and the webcast at our corporate website. I will now turn the call over to Eric..

Thank you, Suzy. Welcome, everyone, and thank you for joining us. I am Eric Thornburg, and it is my honor to serve as President and CEO of SJW Group. I'm very pleased to be with Jim Lynch, Chief Financial Officer of SJW Group; and Palle Jensen, Executive Vice President of San Jose Water Company, here today.

I've been a member of the SJW team for about 100 days now and have been very impressed by the people I serve with.

In addition to the strong financial results SJW delivered for the year, there were a number of significant accomplishments that stand out, the addition of a record $141 million to utility plant through our sensible and systematic infrastructure investment program; startup and commissioning of San Jose Water's Montevina Water Treatment Plant retrofit project; the sale of all of our interest in Texas Water Alliance Limited to the Guadalupe-Blanco River Authority; and further enhancements to our customer and stakeholder communications program; and another successful year of meeting drinking water and environmental regulations, delivering on our commitment to public health and environmental stewardship.

I will now turn the call over to Jim, who will review our financial results. After Jim's remarks, I will address key operational, regulatory and other business matters.

Jim?.

Thank you, Eric.

Our fourth quarter and year-end operating results reflect an increase in customer water usage, general rate case and capital expenditure-related rate increases, SJW Land property sales and the sale of our interest, as Eric mentioned, in our wholly owned subsidiary, Texas Water Alliance, or TWA, to the Guadalupe-Blanco River Authority, or GBRA.

Fourth quarter revenue was $93.5 million, which is an 18% increase over the fourth quarter of 2016. For the year, revenue was $389.2 million, which is a 15% increase compared to 2016. Net income for the quarter was $17.3 million or $0.84 per diluted share. This compares with $13.7 million or $0.67 per diluted share for the fourth quarter of 2016.

For the year, net income was $59.2 million or $2.86 per diluted share compared to $52.8 million or $2.57 per diluted share in the prior year.

The net increase of $0.17 in diluted earnings per share for the quarter was primarily attributable to a $0.29 per share increase in customer usage, $0.25 per share in rate increases and $0.41 per share due to the sale of TWA.

These increases were partially offset by higher water production expenses of $0.28 per share; administrative and general expenses of $0.10 per share; and a net reduction in revenue track in our Water Conversation Memorandum Account, or our WCMA, of $0.08 per share; and $0.31 per share from the sale of real estate investments in 2016 that did not recur in the fourth quarter of 2017.

The $0.29 increase in diluted earnings per share for the year was driven primarily by many of the same factors as the quarter. The impact of the customer rate increases was $1.27 per share. Customer usage increases was $0.46 per share. And the sale of TWA contributed $0.38 per share.

In addition, property sales in 2017 contributed $0.15 per diluted share. These increases were partially offset by higher water production expenses of $0.98 per share that included $0.51 per share in purchased water cost increases, an increase in customer usage of $0.29 per share and limited availability of lower-cost surface water of $0.18 per share.

In addition, administrative and general expenses increased $0.21 per share. And the company recognized $0.31 and $0.27 per share in the prior year related to property sales and true-up revenue from our 2016 general rate case, or our GRC, respectively, which did not recur in 2017.

Customer usage increased 9.1% for the quarter and 7.4% for the year, contributing $9.1 million and $15.4 million in additional revenue, respectively. Despite these increases, in California, we continue to lag authorized usage due to ongoing water use restrictions and water conservation initiatives.

Our California WCMA mechanism allowed us to recover $1.6 million in lost revenue during the quarter and $16.2 million during the year that resulted from ongoing conservation activities. As expected, WCMA revenue is lower for both the quarter and the year due to the partial customer usage recovery.

Rate increases included the 2017 escalation increase of 3.83% that we received as part of our 2016 GRC; a 3.46% midyear rate offset related to wholesale water cost increases by the Santa Clara Valley Water District, or the district; and a 1.5% increase for 2016 additions to our Montevina Water Treatment Plant.

The district-related increase was a result of a 9% increase in the cost of purchased imported water and a 10% increase in the groundwater pump tax beginning in the third quarter of 2017. These costs are passed directly through to our California service area customers.

Water production expenses were also higher due to the increase in customer usage and, for the year, a lower volume of surface water produced from our California watershed. For substantially all of 2017, our Montevina Water Treatment Plant was offline due to the final phase of construction on our plant retrofit project.

Limited water production commenced at the plant at the end of 2017. And full production is scheduled to begin in the first quarter of 2018.

Administrative and general expenses increased during 2017 due to higher salaries and wages, an increase in revenue-based regulatory fees paid to the CPUC and an increase in contracted work primarily related to our recycled water retrofit program. Revenue-based utility taxes paid to the city of San Jose also increased in 2017.

In the fourth quarter, we recognized the sale of TWA to GBRA. TWA was undertaking activities to develop a water supply project in Texas. The sale resulted in a pretax gain of $12.5 million in the fourth quarter of 2017. In addition, in 2017, the company's 444 Santa Clara Street, L.P.

sold its interest in a commercial building and land that the partnership owned and the company sold undeveloped land in California. These two transactions resulted in a pretax gain before amounts attributable to the noncontrolling partnership interest of $6.9 million. The effective income tax rate for 2017 was 37% compared to 39% in 2016.

The rate reduction was primarily due to the tax act, which was signed into law in December of 2017. The tax act lowered the corporate income tax rate beginning in 2018 from 35% to 21%. However, since the act was passed in 2017, we revalued our deferred tax assets and liabilities in the fourth quarter to reflect the new tax rates as of year-end.

We recorded a tax benefit in 2017 of $2.4 million related to the revaluation of deferred taxes in our nonregulated operations. A tax benefit of $83.7 million related to the revaluation of deferred taxes in our regulated operations was reclassified to regulatory liabilities.

In 2017, we completed another successful year of infrastructure reinvestment, adding $37.8 million in company-funded utility plant in the fourth quarter of 2017 and $141.2 million for the year. This includes approximately $19 million spent on our Montevina treatment plant retrofit project. Turning to liquidity.

2017 cash flows from operations decreased 11.7% over 2016, which was primarily attributable to a decrease in the collection of the balancing and memorandum accounts of $20.3 million, other noncurrent assets and noncurrent liabilities and a change in deferred taxes of $3.8 million.

These decreases were partially offset by the collection of previously billed and accrued receivables of $3.7 million; payments of amounts previously invoiced and accrued of $3.2 million; net collection of taxes receivable of $2.8 million; and general working capital and net income adjusted for noncash items of $1 million.

At the end of the year, we had $120 million available on our bank lines of credit for short-term financing of utility plant additions and operating activities. The borrowing rate on our line of credit advances averaged 2.27% during 2017. But with that, I'll stop, and I'll turn it back over to Eric..

Thank you, Jim. Despite the lower-than-average precipitation to date, California's water supply outlook remains favorable, owing to the record precipitation in the early part of 2017 that allowed the state's water managers to store excess water.

Locally, groundwater levels in the Santa Clara Valley remain in their normal range, signifying a full water bank is available in case the dry weather persists in 2018. The Santa Clara Valley Water District, our wholesale water supply agency, continues to maintain their call for 20% conservation.

Usage reductions in 2017 met the target set by the State Water Resources Control Board and the Santa Clara Valley Water District when compared to the 2013 baseline year.

With the elimination of San Jose Water's drought surcharges in February of 2017 and the termination of the state's mandated conservation requirement in April 2017, there was a nice rebound in customer usage compared to the previous year.

Clearly, the water supply challenges and recent drought restrictions have affected our customers as well as San Jose Water. The increasing public awareness of water issues underscores the need for effective, transparent and timely engagement with stakeholders.

SJ Water's efforts to ensure that a comprehensive and effective communication capability is a core competency are allowing us to initiate important, albeit difficult, conversations on water supply, conservation and rates with our customers.

Greater engagement with all stakeholders will be needed as we address long-term structural water supply and environmental challenges facing California and our region. Turning now to regulatory affairs.

Both the California and Texas Public Utilities Commissions have historically recognized the need for continued investments in water system infrastructure and accordingly have enabled regulated water utilities to make those investments.

It's especially noteworthy that SJW's 2017 consolidated capital program exceeded $140 million and marked a record year for utility plant investments. In a little over a decade, more than $1 billion has been invested in our water systems and the communities we serve.

Importantly, the capital program included our Montevina Water Treatment Plant retrofit project, which allows San Jose Water to maximize the use of its high-quality local water supply from our watershed in the Santa Cruz Mountains.

Over the long term, these investments benefit customers, communities and shareholders as they enhance SJW's ability to deliver safe, high-quality and reliable water service and increase shareholder value.

Effective regulatory mechanisms to track and recover lost revenue due to mandated conservation and other drought restrictions also remain in place, owing to the constructive regulatory environment at the California Public Utilities Commission. Conservation is now a way of life in California.

And the commission must continue to provide a high degree of assurance that utilities will have a realistic opportunity to recover their fixed costs. San Jose Water will receive new rates effective January 1, 2018, intended to generate a revenue increase of approximately $16 million or 4.2%.

The amount reflects the 2018 escalation year increase authorized by the decision in our previous general rate case. On January 4, San Jose Water submitted its 2018 general rate case application for new rates in 2019 through 2021.

The application seeks increases of $34.3 million or 9.8% in 2019, $14.2 million or 3.7% in 2020 and $20.6 million or 5.2% in 2021. The application is currently in a year-long review process. And the new rates, if approved, are expected to be effective January 1, 2019.

On February 6, San Jose Water received a proposed decision on its 2017 cost of capital application. As reported, the draft decision proposes a reduction to San Jose Water's authorized return on equity from 9.43% to 8.3% and its overall return on rate base from 8.09% to 7.19%. We are disappointed with the conclusions outlined in the draft decision.

We are hopeful that the commission will reconsider the impact of this proposal before it renders its final decision at the full commission meeting currently scheduled for March 22, 2018. SJWTX, Inc., our Texas water and wastewater utility, is proving to be an excellent investment and outstanding platform for growth.

Since its acquisition in 2006, SJWTX has more than doubled in size from 6500 connections to more than 14,000 owing to a robust water supply portfolio and a strong regional economy along the I-35 corridor that is drawing residents, businesses and jobs.

With a diverse portfolio of water supply, a growing wastewater business and continued additions to customer base through organic growth and acquisitions, we remain optimistic about the prospects for SJWTX.

As previously reported, SJW completed the sale of all its interest in Texas Water Alliance Limited to the Guadalupe-Blanco River Authority in late 2017.

The consummation of the agreement further demonstrates SJW's capability to take on complex water supply projects and collaborate with the public sector to help sustain a region's economic vitality and quality of life.

In January 2018, the board authorized a 7.7% increase in SJW's 2018 dividend to $1.12 per share as compared to the total dividends paid in 2017. This dividend increase follows on the heels of the special dividend of $0.17 per share declared in November 2017, which brought the total 2017 dividend to $1.04 per share.

Both actions significantly increased the dividend payout ratio, bringing us more in line with our target dividend payout of between 50% and 60% of recurring earnings and demonstrate the company's strong commitment to our shareholders. We have now continuously paid a dividend for over 74 years.

And the annual dividend has increased in each of the last 50 years. That is a track record to be proud of. Reflecting on my first 100 days, I'm proud to say we are already taking great strides in fostering a shared set of values, building an enduring culture based on trust and now have a revitalized organizational mission and vision.

Honoring our past yet moving forward, our mission builds on more than 150 years of history. We are trusted professionals delivering exceptional quality water and service to customers and communities while protecting the environment and providing a fair return to shareholders.

To accomplish this mission, our employees have embraced the core values of integrity, respect, service, trust, teamwork, transparency and compassion. As we live these values, we will more fully reach our vision to serve customers, communities, employees, shareholders and the environment at world-class levels.

With that, I'd like to turn the call back to the operator for questions..

[Operator Instructions]. And we have a question from the line of Michael Gaugler with Janney Montgomery..

A couple of questions here, guys. Jim, you mentioned usage in '17 was below authorized. But I believe the track of that had been upward through much of the year.

So I'm wondering, at this point, what's that delta between where you are now and what's your authorized? And then how do you think that plays out here in '18?.

Yes, Michael. So we continue to recover in terms of usage from where we were at the height of the drought here in California. But a lot of the conservation response became somewhat embedded, if you will, in the practices and habits of a lot of our customers.

So we've seen an increase from the lowest level of about -- I think we said 9% on the call, depending upon if you're looking at residential or business customers. And we would hope to see that as the weather here in San Jose cooperates that we'll see some additional recovery.

But in our current general rate case, we are seeking further reduction in the authorized returns to more accurately reflect what we think is usage going forward..

Okay. And then Eric, you mentioned water supply in your comments, the bank at least being normal as we come into the summer season here a couple of months. Jim and I had previously talked about the potential for greater utilization of your own supplies.

And I'm wondering how that thinking has evolved now that it looks like snowpack is a little bit below normal and perhaps things could change as we get out through the year.

I mean, are you still looking at maybe something beyond a turn in your own supplies or just steady state?.

Thank you, Michael. You're absolutely right. The snowfall in the Sierras is much less than what we would have hoped for. But that being said, our groundwater and surface water supplies are in really outstanding shape.

And with the retrofit of the Montevina Water Treatment Plant, we really feel good about our ability to use our own supply, high-quality surface supply. And the groundwater basin is just brimming full. So I think we're in really good shape for the near term..

Okay, that's helpful. And one last one, guys.

On the rate case and the draft decision, the ROE reduction, with rates moving higher and going to be moving higher here throughout '18, what's the rationale for that on the CPUC side?.

Mike, appreciate your question there. Just to be clear, you've got a cost of capital proceeding which is separate from the general rate case proceeding. The draft decision, there's an opportunity for us to provide comments. And those are due on Monday. And we are right on schedule with doing so.

While we're disappointed in the draft, we do take stock that we do have this opportunity to provide and point out to the commission our thoughts and observations and point out some other facts in the record.

So it wouldn't be proper necessarily for me to comment or forecast or speculate on that final decision and -- but we're doing all that we can to address the findings. So that earliest decision would be March 22. But at this point, it has not been officially scheduled for a final report out..

Okay, could've had a little better welcome than that, Eric..

Well, it is important, but we're hard on it..

[Operator Instructions]. And I'm showing no further questions at this time. So I'd like to return the call to Mr. Eric Thornburg for any closing remarks..

Thank you, Sandra. Thank you, all of you on the call today. We really appreciate your interest in our company. We're very proud of our organization and its people. And we look to continue to earn your trust as we go forward. Thank you for your attention. And please never hesitate to reach out to us if you'd like to chat. Thank you very much..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day..