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Edited Transcript of SJW.N earnings conference call or presentation 31-Oct-19 5:00pm GMT

Q3 2019 SJW Group Earnings Call

SAN JOSE Nov 6, 2019 (Thomson StreetEvents) -- Edited Transcript of SJW Group earnings conference call or presentation Thursday, October 31, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric W. Thornburg

SJW Group - Chairman, President & CEO

* James Patrick Lynch

SJW Group - CFO & Treasurer

* Suzy Papazian

SJW Group - General Counsel & Corporate Secretary

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Conference Call Participants

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* Durgesh Chopra

Evercore ISI Institutional Equities, Research Division - Associate

* Hasan Doza

Water Asset Management, LLC - Senior Investment Analyst

* Jonathan Garrett Reeder

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Michael E. Gaugler

Janney Montgomery Scott LLC, Research Division - MD of Utilities & Infrastructure and Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the SJW Group Q3 2019 Financial Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, General Counsel, Suzy Papazian. Ma'am, please go ahead.

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Suzy Papazian, SJW Group - General Counsel & Corporate Secretary [2]

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Thank you, operator. Welcome to the Third Quarter 2019 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 their 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 developments 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 descriptions of some of the factor 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 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 January 27, 2020. You can access the press release on the webcast on our corporate website.

I will now turn the call over to Eric.

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [3]

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Thank you, Suzy. Welcome, everyone, and thank you for joining us. I'm Eric Thornburg, Chairman, President and CEO of SJW Group.

As some of you may know, San Jose Water Company, our flagship water utility in California, was incorporated on November 21, 1866 to serve good and pure water to 400 customers. Fast forward over 150 years later, on October 9, 2019, SJW Group completed our transformative combination with Connecticut Water Service, Inc., forming the third largest pure-play investor-owned water utility based on rate base in the United States.

Together, we will serve more than 1.5 million people with over 700 employees across California, Connecticut, Maine and Texas. The acquisition of Connecticut Water brings together 2 organizations with a shared passion for delivering life-sustaining, high-quality water and exceptional customer service.

All of the operating utilities under SJW Group ownership, San Jose Water, Canyon Lake Water, Connecticut Water, Maine Water, Avon Water, and Heritage Village Water, will continue to deliver outstanding customer service, environmental stewardship and community support with all of our operations remaining locally based and locally managed, just as it is today.

As a leading diversified water utility, each of the combined company's operating utilities will continue to be supported locally with state presidents charged with ensuring a safe and reliable water system, building on our strong record of customer service, providing growth opportunities for employees and focusing on supporting our local communities.

We intend to deliver benefits by serving local communities with a passionate, dedicated team of locally based water professionals who care for and are engaged in improving their local communities.

Delivering exceptional customer service through the sharing of systems, best practices, operational expertise and resources throughout the entire company, maintaining our long-standing commitment to environmental stewardship by operating in a manner that promotes water and energy conservation, source protection and preservation of open space and fostering socially responsible programs in supporting the communities where we live, work and serve.

The combined company will be led by an experienced Board of Directors that leverages the strengths and capabilities of its subsidiaries. 3 new members, with whom I have had the pleasure to serve at Connecticut Water, had joined the SJW Group board adding strength in diversity to our organization with their unique perspectives, experiences and local knowledge of the communities they serve.

On behalf of the entire Board, we welcome Mary Ann Hanley; Heather Hunt; and Carol Wallace and look forward to working with them.

SJW Group is now one of the few publicly traded companies with almost half of its board comprised of women. SJW Group's ability to deliver safe, high-quality and reliable water service is inextricably linked to the health of our environment, both locally and beyond.

As previously reported, we reaffirmed our long-standing commitment to protecting and preserving our environment through the creation of a Board sustainability committee. This committee provides 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.

We published our first corporate sustainability report in 2018 and continue to evaluate and deploy new technologies that will allow us to better serve customers, communities and shareholders, while also protecting our environment.

We are executing our business plan, investing in necessary infrastructure to provide safe and reliable water service to customers and communities and then earning a fair return on and of that investment.

In the last decade alone, more than $1 billion has been invested in our water systems and the communities we serve in California and Texas.

We also remain 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 underway at SJW that should ultimately expand our footprint and build further scale.

The success of our business plan is evident in SJW's strong record of returning capital to shareholders.

We've continuously paid a dividend for over 75 years and the annual dividend has increased in each of the last 51 years, bringing us more in line with our target dividend payout of between 50% and 60% of recurring earnings, thereby delivering long-term value to our shareholders.

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

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James Patrick Lynch, SJW Group - CFO & Treasurer [4]

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Thank you, Eric. Much like the second quarter, our third quarter operating results reflect the positive impact of our 2019 general rate case or GRC; the increased use of California surface water supplies; and a decrease in merger-related cost incurred in connection with our Connecticut Water merger.

Our results also reflect the impact of reserves established against amounts recorded in our 2018 and 2019 water conservation memorandum accounts, or WCMA, and higher purchase water cost from the Santa Clara Valley Water District or Valley Water.

Third quarter revenue was $114 million, a $10.9 million decrease over reported third quarter 2018 revenue of $124.9 million.

Net income for the third quarter was $9.5 million or $0.33 per diluted share. This compares with $15.8 million or $0.76 per diluted share for the third quarter of 2018.

During the third quarter of 2019, the increased availability of surface water contributed $0.12 per share and the decrease in merger-related cost contributed $0.17 per share. These increases were offset by the change in our WCMA balance, including new reserves, totaling $0.35 per share, increased water production cost of $0.10 per share and a decrease in other items of $0.06 per share.

In addition, dilution due to the common equity shares we issued in December 2018 for the Connecticut merger was $0.21 per share.

On October 4, 2019, the California Public Utilities Commission, or the CPUC, issued 2 proposed resolutions for an advice letter we filed in March 2019 for recovery of our 2018 WCMA balance.

The first proposed resolution approves recovery of the 2018 WCMA, while the second denies balance recovery. Both proposed resolutions appear on the CPUC's November 7, 2019, meeting agenda. As a result of the conflicting proposals, the company no longer meets the accounting probability of recovery criteria for alternative revenue programs and has fully reserved the $9.2 million WCMA balance as of September 30, 2019.

In addition, the company has fully reserved the $1.5 million 2019 WCMA balance. Of note, before consideration of the reserves, the WCMA balance for the third quarter of 2019 and year-to-date 2019 had dropped to $900,000 and $1.5 million, respectively, from $4.1 million and $7.1 million, respectively, for the same periods in 2018.

This decrease was due primarily to better alignment of authorized and actual usage in the 2019 GRC, coupled with better alignment of the customer rate structure with actual fixed and variable cost.

As a result, we anticipate that the WCMA will have a diminished impact on our future results.

Turning to our comparative analysis for the third quarter. The decrease in revenue was primarily attributable to a $13.7 million change in the WCMA, including the new reserves, which was partially offset by rate increases that added $1.3 million of new revenue compared to 2018 and $900,000 in new customer revenue, along with a net change in revenue balancing and memorandum accounts of $800,000.

Water production expenses increased $1.2 million during the quarter compared to the third quarter of 2018. The increase was primarily due to higher per unit cost for purchased water and power of $3.9 million, a change in the cost recovery balancing and memorandum accounts of $1.3 million and $700,000 in higher customer usage.

These increases were partially offset by an increase in the use of lower-cost surface water supplies of $4.6 million. Other operating expenses decreased $3.3 million during the 2019 third quarter due to a $6.5 million -- $6.7 million decrease in merger expenses related to our Connecticut Water transaction.

This was partially offset by $2 million in higher general and administrative expenses due primarily to increasing integration and compensation cost and $1.4 million in higher depreciation related to utility plant additions.

Turning to the year-to-date results. 2019 revenue was $294.6 million, a 1% decrease over the same period last year.

Net income for the year-to-date was $28.9 million or $1.01 per diluted share compared to $29.9 million or $1.45 per diluted share during the same period in 2018.

Diluted earnings per share for the 3 month -- or the year-to-date period were impacted by an increased use of surface water that provided $0.30 per share, a decrease in merger-related cost of $0.22 per share and rate increases of $0.20 per share.

In addition, certain balancing and memorandum accounts contributed $0.17 per share and interest on money market funds contributed $0.16 per share.

These increases were offset by the change in our WCMA balance, including new reserves totaling $0.43 per share, a $0.20 per share increase in other production cost, a $0.15 per share decrease in water usage and an increase in depreciation and amortization cost of $0.11 per share.

We also experienced an increase in various other items of $0.20 per share and dilution due to the common equity we issued in December 2018 for the Connecticut merger of $0.40 per share.

The decrease in revenue was primarily attributable to the change in the WCMA of $17.2 million, including the reserves, a $6 million decrease in customer usage and a $2.1 million change due to the OII customer credits I discussed on our second quarter call.

The decrease was partially offset by $10.4 million attributable to net changes in balancing and memorandum accounts, $8 million in cumulative rate increases and $2.6 million in revenue from new customers.

Water production expenses decreased $200,000 in the first 9 months of 2019. The decrease was primarily due to an increase in the use of lower-cost surface water of $11.9 million and a $2.3 million decrease in customer water usage.

This decrease was partially offset by $10.2 million of higher per unit cost for water and power and a $3.8 million net increase in cost recovery balancing and memorandum accounts.

Other operating expenses increased $300,000 in the first 9 months of 2019, primarily due to $4.4 million in higher depreciation expense, $4.2 million in higher general and administrative expenses and $700,000 in higher taxes other than income taxes, partially offset by a decrease of $8.9 million in CTWS merger expenses.

The increase in general and administrative expenses was due primarily to annual wage increases and integration cost for the merger with CTWS.

Other income and expense included $6.3 million of interest income earned on money market fund investments from the proceeds of the company's December 2018 equity offering.

Now turning to our capital expenditure program. We added $38.8 million in company-funded utility plan in the third quarter of 2019, bringing totally company-funded additions year-to-date to $101 million or approximately 70% of our planned capital spending for 2019.

Our year-to-date 2019 cash flows from operations increased 24% over the same period in 2018. The increase was primarily the result of a $27.6 million increase in the collection of balancing and memorandum accounts and a $3.3 million increase in general working capital and net income, after adjustment for noncash items. These increases were partially offset by an $8 million decrease in net taxes payable and a $5.3 million decrease in previously billed and accrued receivables.

At the end of the quarter, we had $83 million available on our bank lines of credit for short-term financing of utility plant additions and operating activities.

With that, I'll stop and turn the call back over to Eric.

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [5]

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Thank you, Jim. Before opening up the floor to questions, I'd like to touch on a few developments in the third quarter.

Utility regulators across our organization have historically recognized the need for continued investments in water system infrastructure and accordingly, have enabled our regulated water utilities to make those investments.

We're seeing the benefits of a strong and resilient water system in California. Pacific Gas and Electric's public safety power shutoff program has impacted many communities in California and San Jose Water was not spared. Because of the investments in our water system, we were able to continue to deliver reliable service during the 2 recent [PSPS] events despite the lack of electrical power at more than 80 of our key water production and distribution facilities. This is a testament, not only to the investments, but also our passionate, knowledgeable and dedicated team who worked around the clock to ensure we can continue to serve our customers and community.

As Jim noted in his remarks, we have established a reserve associated with the recoveries of San Jose Water's 2018 and 2019 WCMA balances. 2 resolutions, 1 denying and 1 approving the recovery of the 2018 WCMA as filed in advice letter 532, are currently under review.

We believe the recovery is supported by commission and state policies and past commission decisions approving recoveries for San Jose Water for the years 2014 through 2017.

We note that this item is currently on the commission's November 7 agenda.

Looking ahead, we believe future financial results are less likely to be impacted by the situation that necessitated the filing of advice letter 532.

San Jose Water's final decision on its 2018 general rate case covering the years 2019 through '21 lowered authorized sales to a level that aligns nicely with current actual consumption.

In addition, a shift in cost recovery allowing 40% of total revenue to be collected through the fixed charge provides a realistic opportunity for the company to earn its authorized rate of return.

Other regulatory developments include approval of an increase to San Jose Water's total 2019 authorized revenue requirement of $655,000 for plant additions related to the Montevina Water Treatment Plant upgrade project in 2018 on September 29, 2019, and rejection of San Jose Water's request for the recovery of the Hydro generation research development and demonstration memorandum account balance of $1.2 million.

The commission rejected the advice letter filing on October 10, 2019, citing an error in the underlying commission decision and recommended a correction of the decision followed by a new filing for recovery.

San Jose Water anticipates the record will be corrected and the filing a new advice letter for the recovery in the fourth quarter. SJW's success has and will continue to be measured by our ability to deliver safe, high-quality and reliable water and exceptional customer service.

Over the last year, we've significantly expanded our customer engagement program, telling our story and more importantly, hearing from our customers and stakeholders about what concerns them. I'm happy to report that we are seeing the result of our efforts. Our recent annual customer service survey in California showed a marked improvement in customer satisfaction levels as compared to 2018.

Our customers give us a positive ratings when it comes to reliability, quality and our commitment to conservation.

Their top priorities include knowing that our water system is prepared for the future and ready for possible emergencies, while their biggest concern continues to be cost.

We recognize that there is more to do on this front and have initiated a customer experience project to further drive customer satisfaction levels. Led by San Jose Water's new Vice President of Customer Service, Tricia Zacharisen, this initiative will evaluate all facets of our customer service program.

Our goal remains to serve customers at world-class levels and clearly, we are headed in the right direction.

As announced earlier today, Maureen Westbrook has been appointed President of Connecticut Water Service effective December 1, 2019. Following our tradition of having strong, experienced and local leadership in our regional operations, Maureen is an accomplished 30-year veteran in Connecticut Water as widely respected by the regulators and officials at the state and national levels as well as amongst her peers within the company and industry.

I also want to thank David Benoit, who will be retiring as President of Connecticut Water Service after a distinguished 24-year career. David's contributions and accomplishments are too numerous to list, and we wish him the very best in his retirement.

Lastly, we would like to extend a warm welcome to President Marybel Batjer to the California Public Utilities Commission and express our appreciation to outgoing President Michael Picker for his service.

We look forward to working with President Batjer and her colleagues and her staff to address the money water-related issues facing California's regulated water utilities.

I'm excited about the future of SJW Group. Our transformative combination with Connecticut Water adds diversification and scale, furthering our ability to serve customers, communities and shareholders and the environment.

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 and trust in SJW, and we'll be happy to answer any questions you might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Durgesh Chopra of Evercore ISI.

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Durgesh Chopra, Evercore ISI Institutional Equities, Research Division - Associate [2]

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So first, congrats on getting the deal completed here. That's pretty good accomplishment. Just I wanted to kind of ask you on the write-down that you took in the quarter that has related to reserves. You mentioned there were 2 commission rulings, 1 in favor and 1 not in favor. What was the rationale or reasoning behind the decision which was not in the favor of you recovering those balances?

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James Patrick Lynch, SJW Group - CFO & Treasurer [3]

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Well, first of all, let me be clear, their proposed resolutions as opposed to decisions, they will be voted in -- on November 7 by the commission, after which we will find out what the decision is. The rationale for denying the proposed -- or the proposed recovery was essentially focused on the fact that the drought has not been -- or has been over, if you will, since the Governor declared it as such in 2016.

And a contention by the office ratepayers advocate that the -- by allowing recovery, the company would essentially be over-earning. Those were essentially 2 main points in the denial proposed resolution. And in response to that, quite frankly, even though the drought has been declared over since April 2017, the Santa Clara Valley Water District still has in place a 20% call for conservation and many of the restrictions that were put in place by the state water resources control board remain in place. And so it's our contention that we continue to feel the influence of the drought through these restrictions and the WCMA was put in place to insulate, if you will, the company from the impact of water restrictions and also to allow us to recover our authorized return, while at the same time promoting conservation. So from that perspective, we believe that the WCMA still has a purpose and is still is functioning as it was intended to do so.

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Durgesh Chopra, Evercore ISI Institutional Equities, Research Division - Associate [4]

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Okay. I guess just from our standpoint here, like -- I mean -- I guess if you think about, correct me if I'm wrong here, but is it risk that you may not be able to book the WCMA entries going forward, if the commission chooses so on November -- the date that you provided earlier on, is that the right way to think about it?

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James Patrick Lynch, SJW Group - CFO & Treasurer [5]

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Well, the WCMA still remains an active balancing account or memorandum account for us. The commission has not proposed at this point to eliminate the WCMA as a mechanism that can be used by the company. The reason we put the reserves in place are because of the 2 proposed decisions. We don't meet one of the accounting criteria. So this is one of those situations where accounting and regulatory practices are intersecting and potentially leading to different conclusions.

We do still feel, based upon the track record that we have in terms of collecting prior WCMA balances, that we have good standing in terms of requesting this particular balance and that we will certainly support such as we move forward and go through the commission approval process. As far as going forward though, I would also like, yes, you to kind of take heed of some of my comments that I made this morning relative to, and Eric made this morning, relative to the effectiveness of the WCMA in terms of -- and the impact that conservation will have on our usage going forward and therefore, the benefit that it would provide for us going forward.

Because of the last -- or in the last general rate case because of the change in the authorized usage, which drives our ability to recover our authorized return as well as the better alignment of our fixed and variable cost with our actual fixed and variable cost, we believe that moving forward, the WCMA will have a much less impact on the total revenue that we record, absent the -- even if we were to meet the probability criteria as we move forward.

And I think that's demonstrated by the fact that in the quarter, we only had about a $900,000 benefit absent the reserve, but we would have only have had a $900,000 benefit from the WCMA as compared to last year's third quarter, where that number was about $4.1 million.

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Durgesh Chopra, Evercore ISI Institutional Equities, Research Division - Associate [6]

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That $900,000, is that a pretax number, James?

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James Patrick Lynch, SJW Group - CFO & Treasurer [7]

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Yes. That's a pretax number.

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Durgesh Chopra, Evercore ISI Institutional Equities, Research Division - Associate [8]

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That's Q3 2019?

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James Patrick Lynch, SJW Group - CFO & Treasurer [9]

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That's correct.

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Operator [10]

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Our next question comes from of Hasan Doza of Water Asset Management.

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Hasan Doza, Water Asset Management, LLC - Senior Investment Analyst [11]

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On WCMA for 2019 and, Jim, you alluded to it on a dollar basis, which was very helpful. My follow-up is on per-customer usage basis. So for 2019, can you help us understand how is your actual usage on a per-customer basis is tracking versus the usage level embedded in your new rates? Like what are the actual levels on a [CCF] basis for both?

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James Patrick Lynch, SJW Group - CFO & Treasurer [12]

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So I can't give it to you on a [CCF] basis, Hasan, and thank you for your question, but what I can tell you is that we are -- if my recollection is correct, we're about 4% ahead in the quarter for our residential customer usage and we're about 5% behind in our business usage for the quarter. And just to put that in a little perspective, about 60% of our total revenue is generated from our residential customers and about 40% is generated from our business customers.

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Operator [13]

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Our next question comes from Michael Gaugler of Janney Montgomery Scott.

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Michael E. Gaugler, Janney Montgomery Scott LLC, Research Division - MD of Utilities & Infrastructure and Senior Analyst [14]

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On further merger cost, I think you said was it was $0.05 in the third quarter. Any idea what we could be looking at in terms of the fourth quarter?

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James Patrick Lynch, SJW Group - CFO & Treasurer [15]

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Well, we do have 2 fairly larger expenses related to the merger that are still outstanding. One is as it relates to a fee that we will be paying our bankers and one that relates to the treatment of our deferred taxes in the -- leading up to the transaction we were creating deferred taxes for the tax consequences of the expenses that we were spending in the merger.

And those 2 items total, I think, roughly around $12 million. So those would be the 2 largest expenses that we would be looking at in terms of the fourth quarter and then some integration cost.

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Michael E. Gaugler, Janney Montgomery Scott LLC, Research Division - MD of Utilities & Infrastructure and Senior Analyst [16]

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Okay. And then I think you said equity dilution year-to-date was roughly $0.40. Do you know what that was in the third quarter?

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James Patrick Lynch, SJW Group - CFO & Treasurer [17]

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I think just for the quarter, that number was $0.21. Let me confirm that. Yes. It was $0.21 for the third quarter.

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Michael E. Gaugler, Janney Montgomery Scott LLC, Research Division - MD of Utilities & Infrastructure and Senior Analyst [18]

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Okay. Depending on how the -- let's say, the commission votes to approve recovery of the WCMA. Can we expect to see a press release from SJW reversing the accounting treatment shortly thereafter? Or would you wait till the quarter to do that?

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [19]

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We would -- we feel it -- well, it's a noncash charge. We feel it's a large enough number to where we would file a press release.

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Michael E. Gaugler, Janney Montgomery Scott LLC, Research Division - MD of Utilities & Infrastructure and Senior Analyst [20]

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Okay. So I'll be looking for something probably on the 8th.

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James Patrick Lynch, SJW Group - CFO & Treasurer [21]

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Very good, Michael.

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Operator [22]

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(Operator Instructions) The next question comes from the line of Jonathan Reeder of Wells Fargo.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [23]

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Jim, could you remind me the revenue increase from San Jose Water GRC for the full year, that was like $16.5 million, right?

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James Patrick Lynch, SJW Group - CFO & Treasurer [24]

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That's right.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [25]

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So why was there only a $1.3 million revenue increase in Q3 from the change in those water rates? I know it was much higher in Q1 and Q2, and then Q3 is a higher usage period.

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James Patrick Lynch, SJW Group - CFO & Treasurer [26]

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Yes. It's a real good question, Jonathan, and I don't want to get too technical on the response and I'd be happy to give you some additional information on it off-line. But the long and short of it is, in the general rate case, we were able to get, as part of our initial rate increase, the midyear adjustment for the Santa Clara Valley Water cost.

So the Santa Clara Valley Water cost were included in beginning rates for the first 2 quarters. And then when the actual rate went in to effect in the third quarter, it -- the water cost full impact was reported there, wherein the first 2 quarters, the rate increase associated with that water cost had already been put in place, and we extensively put the difference into a balancing account that we're reversing out. So you're not going to see it in the change in rates, but what you're going to see it is -- is that impact would have been included in the change in the balancing accounts.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [27]

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Okay. Yes. It might be useful to chat after the call on that to help me understand that.

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James Patrick Lynch, SJW Group - CFO & Treasurer [28]

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Yes. I guess the long and short of it is, it's just the way that we were allowed the rate increase for the district in the first year of the general rate case. That's the long and short of the answer. And I'd be happy to walk you through it.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [29]

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Yes. Yes, okay. Because yes, I was kind of thinking like the $6.7 million that you had recorded during the first half of the year would imply another $9.5 million, $10 million during the second half of the year pickup there, but it sounds like that may not be the case because of that. So...

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James Patrick Lynch, SJW Group - CFO & Treasurer [30]

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Well, we will. In fact, we are on track to, as I said, if you listened to where we are relative to our usage numbers, we are pretty well on track to hitting our authorized revenue number. It's just the geography of where that's represented in the change over the quarter.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [31]

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Okay. And you said on the residential side, what was the usage compare there?

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [32]

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We were up about 4% on the quarter.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [33]

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Okay. And your year-to-date, you're 4% up on the residential, 5% down on business?

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James Patrick Lynch, SJW Group - CFO & Treasurer [34]

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Yes. That's about right.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [35]

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Okay. And then, I think it was in your proxy that you indicated the 2021, yes, standalone EPS was projected at like $2.43. Is that still accurate? And then should we expect the mid- to high single-digit accretion from the Connecticut Water deal off of that $2.43 stand-alone base?

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James Patrick Lynch, SJW Group - CFO & Treasurer [36]

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Yes. I think we're pretty comfortable with that for 2020. You mentioned 2020, right? That wasn't 2019. That's 2020?

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [37]

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I think it was 2021 that you guys had...

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James Patrick Lynch, SJW Group - CFO & Treasurer [38]

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'21. '21. Yes. That sounds right. For 2021, yes.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [39]

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Okay. So yes, that helps a lot. And then can you also help me understand your production expenses? What caused the $1.3 million increase in cost recovery balancing and memorandum accounts? Because I think it's like $3.8 million year-to-date. Is there like an offsetting the revenue recognition there or anything that is, like, income-neutral? Or what are the items kind of?

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James Patrick Lynch, SJW Group - CFO & Treasurer [40]

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Yes. So anything absent an increase in customer usage is driven primarily by 2 things: One is within rates, we have the increase in cost from the water district either through pumping or the pump tax or the actual purchase of imported water. And that's covered by the general rate case, as I mentioned earlier.

In addition, we did have some incrementally higher cost relative to the treatment of water coming out of our Montevina Water Treatment Plant, and those costs were really driven by the fact that because we are treating more brackish water, it's costing us to more to dispose of the particulates that we take out of the plant. So those are really the things that are driving the higher water cost. And you really have to take a look at that relative to the fact that we're also getting more water out of that plant.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [41]

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Okay. So that kind of offsets it?

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James Patrick Lynch, SJW Group - CFO & Treasurer [42]

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Yes.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [43]

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If we could follow-up on the first point, that will be useful.

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James Patrick Lynch, SJW Group - CFO & Treasurer [44]

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You bet. Very good.

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Operator [45]

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At this time, I'd like to turn the call back over to Eric Thornburg for any closing -- Actually, I'm sorry, we do have a follow-up question from Durgesh Chopra of Evercore ISI.

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Durgesh Chopra, Evercore ISI Institutional Equities, Research Division - Associate [46]

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Sorry, I forgot to dial this in the first time. Any -- just any commentary on, like, forward-looking guidance and when might that -- when might we expect now that the merger is closed?

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [47]

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I'm sorry, on forward-looking items, you're talking about just generally how we see the future?

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Durgesh Chopra, Evercore ISI Institutional Equities, Research Division - Associate [48]

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Yes. Your EPS or -- like your peers, some of your peers put out.

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [49]

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Got you. Yes. Thank you.

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Durgesh Chopra, Evercore ISI Institutional Equities, Research Division - Associate [50]

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A forward-looking guidance, along with a long-term EPS growth, something like that along those lines.

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James Patrick Lynch, SJW Group - CFO & Treasurer [51]

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Yes. I appreciate the question, and we have received that a lot. We understand that, that would be a benefit to our analysts and investors. And we are considering that and our board. We've -- putting the 2 companies together, it is truly transformative, and we'll -- we want to make sure that we're able to give you real good clear sight forward and we're working on that. We would expect to be out in December and January on some investor meetings, and we will do everything we can to give you a strong sense of our forward momentum there, and how we're doing.

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Operator [52]

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At this time, I'd like to turn the call over to Eric Thornburg for any closing remarks. Sir?

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [53]

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Yes. Thank you, operator, and thank you, everyone, for joining the call today. We appreciate your interest in SJW Group and your support. We continue to focus on executing our growth strategy to invest in and return -- and earning return on our investment and infrastructure, to continue our acquisition program going forward and to provide services to other utilities as part of our core business strategy.

So we continue to look forward to the future. We're very excited about our new company and the additional diversification that we've achieved, not just in terms of territory, but in regulatory environments and economic environments, and we're very excited about having this merger concluded and getting forward. So thank you, again, for your interest in our company.

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Operator [54]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.