Suzy Papazian - General Counsel and Corporate Secretary Eric Thornburg - President and Chief Executive Officer James Lynch - Chief Financial Officer and Treasurer.

Durgesh Chopra - Evercore ISI Michael Gaugler - Janney Montgomery Scott.

Good day, ladies and gentlemen, and welcome to the SJW Group third quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this call is being recorded.

I would now like to turn the conference over to Ms. Suzy Papazian, Corporate Secretary and General Counsel of SJW Group. You may begin..

Thank you, operator. Welcome to the third quarter 2018 financial results conference call for SJW Group. Presenting today are Eric Thornburg, Chairman of the Board, 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 and our merger 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 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 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 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 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 October 28, 2019.

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

Thank you, Suzy. Welcome, everyone, and thank you for joining us. I'm Eric Thornburg, Chairman, President and CEO of SJW Group. I'm very pleased to be joined by Jim Lynch, Chief Financial Officer of SJW Group, and Palle Jensen, Executive Vice President of San Jose Water. Let me begin by updating you on our merger with Connecticut Water.

As announced on August 6, 2018, SJW Group and Connecticut Water amended the terms of our merger agreement from a stock-for-stock transaction to an all-cash acquisition of all outstanding common shares of Connecticut Water by SJW Group for $70 per Connecticut Water common share.

The cash transaction, which has a value of $1.1 billion and an equity purchase price of $843 million, is expected to be accretive to SJW Group’s earnings per share in 2019 post-close, increasing to high-single-digit percentage EPS accretion in 2021.

Both the SJW Group and Connecticut Water board strongly believe that the amended agreement will help facilitate the closing of the company's transformative combination, which will create a leading national water and wastewater utility.

We remain on track to complete the transformative combination in the first quarter 2019 and continue to be confident that we’ve structured it to enable significant benefits for shareholders, customers, employees and the communities we serve.

A special meeting of shareholders to vote on the amended agreement has been scheduled by Connecticut Water for November 16, 2018. In the meantime, we’ve been hard at work taking the appropriate steps to complete the necessary regulatory approvals required to close.

Also, in the last few weeks, we’ve participated in hearings with our Maine and Connecticut regulators. They're going well and we anticipate concluding them soon. SJW Group also continues to respond to the order instituting investigation issued by the California Public Utilities Commission regarding this transaction.

Our opening and reply comments were submitted to the CPUC on September 14 and October 19, 2018 respectively. The CPUC has indicated that it remains committed to a processing schedule that would allow for the completion of the OII by the end of 2018.

Turning to slide five, in addition to making progress towards closing the Connecticut Water transaction, I'm pleased to report that SJW Group continues to execute on the core of its growth strategy – investing in necessary infrastructure to provide safe and reliable water service to customers and communities and earning a return of an and on that investment.

Our capital investment program continues to add to our rate base, the earnings engine of our company. And we are on track to complete approximately $120 million in capital investments in 2018. Over the last 10 years, we have invested approximately $1 billion in our water systems to deliver for our customers and shareholders.

Our ability to invest in our infrastructure underscores the expertise and superb execution of our talented team at SJW and our business partners, as well as our constructive relationships with our regulators who recognize the need for increased investments in our water systems to deliver safe, high-quality and reliable water service.

The prudent management of our business and financial resources will remain fundamental to our growth and our ability to return capital to shareholders.

We’re proud of our long-standing history of more than 74 years of continuous dividend payments and the increase of our annual dividend in each of the last 50 years, and looking forward to continuing to drive even greater shareholder value as a combined company.

With that, I'll now turn things over to Jim Lynch who will provide you with a detailed review and analysis of Q3 results and other financial commentary. After Jim's remarks, I’ll provide additional information on regulatory and other business matters.

Jim?.

Thank you, Eric. Third quarter revenue was $124.9 million, a $275,000 increase over the third quarter of 2017. Rate increases for the quarter resulted in $3.1 million of additional revenue.

These rate increases were primarily the result of a 4.2% general rate increase that went into effect on January 1 as provided for in our 2015 California general rate case application and a 3.6% rate increase effective July 1 to recover California water cost increases imposed by the Santa Clara Valley Water District, or the district.

New customers contributed an additional $1 million in quarterly revenue due primarily to the acquisition of the Deer Creek Ranch Water System in Texas, along with organic customer growth in our Texas service area.

These increases were partially offset by a net $3.1 million decrease in balancing and memorandum account revenue due to the adoption of the new financial accounting standard boards revenue standard update, implementation of the Tax Cuts and Job Act or the tax act, and a lower return on rate base as authorized in our California cost of capital proceeding.

Recall that both the California and Texas utility commissions directed us to pass through the benefits from the tax act derived from regulated company activities to our regulated customers. Net income for the quarter was $15.8 million or $0.76 per diluted share. This compares with $19.5 million or $0.94 per diluted share for the third quarter of 2017.

The decrease in net income was primarily due to an increase in water production expenses during the quarter of $1.8 million.

This increase was due to higher per unit costs for purchased water and power of $4.9 million, partially offset by lower cost recovery in our production cost balancing and memorandum accounts of $2.4 million and an increase in surface water production of $1 million.

In addition, other operating expenses increased $11.8 million for the quarter, primarily due to $8.4 million in CTWS merger expenses and $1.6 million in higher depreciation. Income taxes were $9.4 million lower due primarily to the statutory federal tax rate change from 35% to 21% and lower pretax income.

Diluted earnings per share for the quarter were $0.76, a decrease of $0.18 per share compared to the third quarter of 2017.

The impact of quarterly activity on comparative diluted earnings per share included a $0.22 increase in 2018 related to higher customer rates, $0.05 from new customers, and an increase of $0.05 related to available surface water.

These increases were offset by merger-related transaction costs of $0.32 per share, lower balancing and memorandum account activity of $0.08 per share, and higher depreciation of $0.04 per share. Turning to our year-to-date results, revenue was $299 million, a $3 million increase over the third quarter year-to-date revenue in 2017.

Rate increases for the year resulted in $14.9 million of additional revenue. Customer usage increases contributed an additional $7.4 million year-to-date. And new customers, primarily in our Texas service area, increased revenue by an additional $1.8 million.

These increases were partially offset by a net $20.6 million decrease year-to-date in balancing and memorandum account revenue due primarily to higher customer usage, implementation of the tax act, and a lower return on rate base authorized in our California cost of capital proceeding.

The decrease in net income was driven by many of the same factors as the quarter. Year-to-date water production expenses increased $6.8 million.

This increase was primarily due to higher per unit costs for purchased water and power of $11 million and increased water volume purchases of $4.6 million, partially offset by lower cost recovery in our production cost balancing and memorandum accounts of $3.1 million and an increase in lower-cost surface water production of $5.7 million.

In addition, other operating expenses increased $23.2 million year-to-date, primarily due to $15 million in Connecticut Water merger costs and 4.7 million in higher depreciation. Year-to-date 2017 other income also included a $6.9 million pretax gain on the sale of real estate investments.

No similar real estate sales occurred during the first nine months of 2018. Income taxes were $19.5 million lower for the first nine months of 2018 compared to 2017 due primarily to the lower statutory federal tax rate and lower pretax income.

Year-to-date diluted earnings per share were $1.45, which is a decrease of $0.58 per share compared to the same period in 2017. Rate increases contributed $0.75 per share. Increased customer usage contributed $0.34 per share. The increased availability of surface water contributed $0.27 per share. And new customers contributed $0.08 per share.

These increases were primarily offset by lower balancing and memorandum account contributions of $0.68 per share, primarily due to the impact of our water conservation memorandum account, the California cost of capital proceeding, and the tax act.

In addition, we incurred merger-related costs of $0.58 per share, higher water production expenses of $0.33 per share and an increase in depreciation and amortization cost of $0.14 per share. Also, the gain on sale of real estate investments in 2017 that did not reoccur in 2018 resulted in the difference of $0.15 per share.

Turning to our capital program, we added $35.7 million in company funded utility plant in the third quarter of 2018. This brings total company-funded additions year-to-date to $97.8 million.

At the end of the quarter, we had $69 million available on our bank lines of credit for short-term financing of future utility plant additions, as well as other operating activities. With that, I will stop and turn the call back over to Eric..

Thank you, Jim. Before opening up the floor to questions, I'd like to touch on a few developments during the third quarter and reiterate our go-forward growth strategy. We continue to work closely with the CPUC to reach a fair resolution regarding their review of some of our billing practice.

Since we were first notified of the potential billing issue in early 2017, San Jose Water has diligently worked to thoroughly investigate and expeditiously remedy this matter.

While our internal investigation found no evidence that the company has ever engaged in double billing, a fact supported by our settlement with the Public Advisors Office in our general rate case proceeding, we did learn that we were out of alignment with industry standards.

We have taken several steps to address that inconsistency, including voluntarily revising our billing practice to prorate service charges for rate changes when they occur within a billing period effective January 2017, filing with the CPUC to propose refunds for our customers for the three-year period of 2014 through 2016, addressing the matter in our current general rate case proceeding and reaching a settlement with the CPUC's Public Advocates Office extending the refund period from June 2011 through December 2016 subject to final approval, and responding to inquiries from our customers in various divisions within the CPUC as well as to the CPUC's investigation order.

Our customers are important to us and we’re committed to continuing to work closely with the CPUC on this matter as needed. Now, on a parallel path, San Jose Water continues to pursue its general rate case application with the CPUC.

We’re closely reviewing a recently issued proposed decision, which incorporates the settlement on the vast majority of issues identified in the preceding. A final decision is anticipated in November 2018 with new rates effective on January 1, 2019.

Regulatory filings this quarter included an advice letter filing with the CPUC to incorporate the 2017 investments in the Montevina Water Treatment Plant retrofit project integrates into rates.

This rate change was approved effective August 25, 2018 and increased revenues by approximately $3.2 million or about 1% of San Jose Water’s 2018 authorized revenue requirement. Turning to Texas, SJWTX, Inc., our Texas water and wastewater utility, continues to increase its contribution to consolidated earnings.

Customer growth year-to-date in 2018 is an impressive 12%, owing to our previously announced acquisition of the Deer Creek Ranch Water System on July 3, 2018, as well as strong organic growth. The area within and immediately adjacent to our service area remains one of the fastest growing regions in the United States.

SJWTX remains focused on not only serving our current customers with safe, high-quality and reliable water service, but also assisting our neighboring utilities with their growth challenges through our diverse portfolio of water supplies and operating expertise.

With our track record of growth both organically and through acquisitions, we remain optimistic about the prospects for SJWTX. SJW Group’s mission has and will continue to be measured by our ability to deliver safe, high-quality and reliable water service, while also protecting and preserving the environment.

This commitment is on display daily as our team delivers exceptional quality water and service to our customers, while being a good steward of the environment where we live, work and serve.

Reaffirming the company's long-standing commitment to environmental leadership, the SJW Group board has formed a sustainability committee to provide guidance to the board on key aspects of our corporate social responsibility program, including health and safety, environmental stewardship and water supply as we look to further cement our status as industry leaders in water treatment, operations and service delivery.

I'd like to take this opportunity to highlight our go-forward growth strategy because it's at the core of everything we do across the organization. SJW Group operates two high quality water systems in economically vibrant and growing regions.

We continue to execute on our business plan, while also remaining keenly focused on continuous improvements in our operations through the deployment of innovative technology, prudent financial management and investments in our employees to deliver world-class water service.

Our transformative combination with Connecticut Water will be a big driver of our future success, but so will the various significant investments and other organic growth initiatives that are well underway at SJW Group. Over the long haul, we remain confident in our ability to deliver sustained growth and profitability, earnings and dividends.

Thank you for your continued support. I'll be happy to answer any questions you might have..

Thank you. [Operator Instructions]. Our first question comes from Durgesh Chopra of Evercore ISI. Your line is now open..

Good morning, team. .

Good morning..

So, two questions for me. The first on the quarter for you, Jim. Just on slide 10, the other bucket – and I apologize if you went over this already, but what is that comprised of? It’s rather a sizable number..

The other bucket is items that – and this is the $0.06 per share, but it’s items that don't individually kind of raise themselves to the discussion really on a specific basis.

And it could include items such as changes in our maintenance expenses or changes in our property tax that individually wouldn't be something that we would like to talk about on the call per se. But I can give you a more specific detail at your request..

Okay, perfect.

But just high level, are these going to be like one-time items? Or do you think that they sort of – when we’re thinking about modeling these, are these more recurring in nature?.

Well, it's probably more recurrent in nature. For example, the property tax changes principally due to the higher investment that we have in CapEx, and so on a go-forward basis, we have to factor that in. Maintenance, there is more expenses in there that could be one time and we would be able to manage those.

So, there could be some variability in that..

Beautiful. Thanks.

And then, Eric, can you give us a recap of the financing plan for the merger real quick? And then, just how are you thinking about the timing of that plan? Like, when could you execute it? Would you wait for the regulatory approval or you’d look to execute it before then?.

Yeah. Thank you, Durgesh, for your question. If it's okay, I'm going to have Jim answer the question. He’s been leading our team effort on that matter..

Yeah. So, we’re looking right now at financing the transaction through a conservative mix of debt and equity and we expect it to occur sometime between now and when the transaction closes. And as Eric mentioned right now, we’re anticipating a January close for the transaction.

So, we’ll be watching the market, both the debt and equity markets between now and then to take full advantage of an opportunistic time..

Awesome. Thank you, guys. Great quarter. .

Thanks..

Thank you..

Thank you. [Operator Instructions]. Our next question comes from Michael Gaugler of Janney Montgomery. Your line is now open..

Good morning, everyone..

Good morning, Michael..

Just wondering if you can provide any guidance on acquisition costs in Q4..

The costs that we anticipate going forward are largely going to be related to the issuance of our debt and equity. And, obviously, as you know, Michael, those costs are going to be residing in, for equity, in the net proceeds, and so they won't go through the P&L and the debt would be capitalized and amortized going forward.

So, those would be the biggest costs that we would see, and neither one of those would directly impact the profitability of the company going forward except to the extent of future amortization of the debt cost. So, right now, I think we've got a lot of the big costs behind us as it relates to the transaction.

We do have some fees that we will pay to our advisors as the success of the transaction occurs. At this point, though, those are not yet contemplated as the transaction is still moving forward to completion..

Okay. That's all I had, gentlemen. Thank you..

Okay. Thanks, Michael..

Thank you. [Operator Instructions]. And this does conclude our question-and-answer session. I would now like to turn the call back over to Eric Thornburg for any closing remarks..

Very good. Thank you, operator. Thank you, everybody, for participating in today's call. We really appreciate your interest and support in our company. We’re very excited about our future and we look forward to keeping you updated on those matters as we go forward. So, everybody take care and we’ll talk to you soon..

ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day..