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Edited Transcript of SJW.N earnings conference call or presentation 25-Jul-19 5:00pm GMT

Q2 2019 SJW Group Earnings Call

SAN JOSE Jul 27, 2019 (Thomson StreetEvents) -- Edited Transcript of SJW Group earnings conference call or presentation Thursday, July 25, 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

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Conference Call Participants

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* Durgesh Chopra

Evercore ISI Institutional Equities, Research Division - Associate

* 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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Good day, ladies and gentlemen, and thank you for your patience. You've joined the SJW Group Q2 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, CFO Jim Lynch. Sir, you may begin.

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James Patrick Lynch, SJW Group - CFO & Treasurer [2]

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Thank you, operator. Welcome to the Second Quarter 2019 Financial Results Conference Call for SJW Group. Presenting today is Eric Thornburg, Chairman of the Board, President and Chief Executive Officer; and I am James Lynch, Chief Financial Officer. For those who would like to follow along, slides accompanying our 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 a brief description of some of the factors that could cause actual results to be different from statements in this presentation, we refer you to the financial results press release and to our more 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 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.

With that, I'll 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, Jim. Welcome, everyone, and thank you for joining us. I'm Eric Thornburg, Chairman, President and CEO of SJW Group. Let me begin by updating you on our merger with Connecticut Water. We continue to make excellent progress with our joint merger approval application filed on April 3, 2019, with the Connecticut Public Utilities Regulatory Authority or PURA. I am pleased to report that SJW Group and Connecticut Water have reached the settlement agreement with Connecticut's Department of Energy and Environmental Protection and Office of Consumer Counsel. The settlement agreement clarifies and enhances the commitments proposed in our application that will provide additional, direct long-term customer and environmental benefits, enhance local control and deliver supplemental financial protections to customers. Accordingly, on July 3, 2019, we filed a request with PURA to approve the settlement agreement and our merger application with the support of those key stakeholders.

The filing marks an important step in the pathway to closing this transaction and the many benefits it will deliver to customers, shareholders, employees and the community. PURA has determined the next procedural steps and the schedule to complete the proceeding. A draft decision is expected on August 19, 2019, and a final decision on September 4, 2019.

As announced on May 3, 2019, Maine Water company, an operating subsidiary of Connecticut Water, filed a new application with the Maine Public Utilities Commission seeking approval of the merger. The new application shows that the merger provides immediate and long-term customer benefits, protects jobs and serves the interest of Maine Water's customers, employees and local communities. While we do not have as much clarity with the main processing schedule, we do anticipate that the final decision will be rendered in the September time frame. The transaction is on track to close in the third quarter of 2019, and we will, of course, continue to provide updates on any material developments. Thank you for your patience and continued support of SJW throughout this process.

With that, I'll now turn things over to Jim Lynch, who will provide you with a detailed review and analysis of Q2 results and other financial commentary. And after Jim's remarks, I will 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. Our second quarter operating results reflect the positive impact of our general rate case increase in California and the increased use of our California surface water supplies partially offset by a decrease in customer usage and customer credits related to a settlement agreement filed in our California Order Instituting Investigation, or OII, on past customer billing practices.

Second quarter revenue was $103 million, which was a $9.3 million increase over reported second quarter 2018 revenue of $99.1 million. Net income for the quarter was $13.4 million or $0.40 -- $0.47 per diluted share. This compares with $12.9 million or $0.62 per diluted share for the second quarter of 2018.

During the second quarter of 2019, rate increases contributed $0.10 per share, increased availability of surface water contributed $0.08 per share and interest on new money market fund investments contributed $0.06 per share compared to the second quarter of 2018. These increases were offset by dilution of $0.18 per share due to the equity we issued in December of 2018, a $0.06 per share decrease due to lower water usage, $0.06 per share related to a settlement agreement with the California Public Utilities Commission Consumer Protection and Enforcement Division, or the CPED, over the company's past customer billing practices and a decrease in other items of $0.09 per share.

The settlement agreement with the CPED, which is subject to final commission approval, requires the company to pay approximately $2.1 million in customer credits and invest $5 million in future utility plant that is not allowed an investment return or rate recovery. The utility plant investment is required to be initiated within 12 months from final CPUC approval of the agreement.

During the second quarter, we established a settlement reserve for the customer credits with an offset to revenue. We will record the $5 million investment in utility plant at the time the investment is made. Eric will provide additional details on the OII settlement agreement in his remarks to follow.

Turning to our comparative analysis for the second quarter. Rate increases resulted in $3.6 million of new revenue over last year's second quarter. The net change in balancing and memorandum account added an additional $3.6 million and $800,000 was added by new customers. These increases were partially offset by the $2.1 million OII customer credits and $2.1 million in lower customer water usage.

Water production expenses increased $2.2 million during the quarter compared to the second quarter of 2018. The increase was primarily due to higher per unit cost for purchased water and power, up $3.6 million and the impact of cost recovery balancing and memorandum accounts of $2.2 million. This increase was partially offset by an increase in lower cost surface water production of $3 million and decreased customer usage of $600,000.

Other operating expenses increased $2.5 million during the 2019 second quarter due to $1.5 million in higher general and administrative expenses, which was primarily related to increased employee compensation and pension costs, $1.4 million in higher depreciation related to utility plant additions and $500,000 in higher maintenance and taxes other than income taxes, partially offset by a decrease of $900,000 in expenses related to our proposed merger transaction with Connecticut Water.

For the 6 months of 2019, revenue was $180.6 million, which was a 4% increase over the same period last year. Net income for the first half of 2019 was $19.4 million or $0.68 per diluted share compared to $14.2 million or $0.68 per diluted share during the same period last year. The contributing factors to our first half results were many of the same as those noted for the quarter.

Increased availability of surface water contributed $0.20 per share, rate increases contributed $0.18 per share and interest on new money market funds contributed $0.11 per share. In addition, the net recognition of certain balancing and memorandum accounts contributed $0.10 per share and other items contributed $0.06 per share. These increases were offset by a $0.26 per share dilution due to our December 2018 equity issuance, a $0.16 per share decrease in water usage and $0.09 per share increase in other production costs.

In addition, we experienced an increase in depreciation and amortization cost of $0.08 per share and recorded $0.06 per share related to the CPED settlement agreement on the company's past billing practices.

Rate increases year-to-date resulted in $6.7 million of new revenue. An additional $6.2 million was attributable to the net changes in balancing and memorandum accounts and $1.7 million was attributable to new customers. These increases were partially offset by $5.9 million in lower customer water usage and $2.2 million due to the OII customer credits.

Water production expenses decreased $1.4 million in the first 6 months of 2019. This decrease was primarily due to an increase in the use of lower cost surface water production of $7.3 million and a $3 million decrease in customer water usage. This decrease is partially offset by $6.4 million of higher per unit cost for purchased water and power and a $2.5 million increase in cost recovery of balancing and memorandum accounts.

Other operating expenses increased $3.7 million in the first 6 months of 2019 primarily due to $3 million in higher depreciation expenses, $2.2 million in higher general and administrative expenses and $600,000 in higher taxes other than income taxes, partially offset by a decrease of $2.2 million in expenses related to our proposed merger transaction with CTWS.

Other income expense included $4.2 million of interest income earned on new money market fund investments from the proceeds of the company's December 2018 equity offering.

Turning to our capital expenditure program. We added $32.7 million in company-funded utility plan in the second quarter of 2019 bringing total company funded additions for the first half of the year to $62.3 million. This represented approximately 48% of our planned 2019 capital budget.

Our first half 2019 cash flows from operation increased 10% over the same period in 2018. The increase is primarily the result of a $7.2 million increase in general working capital and net income after adjusting for noncash items and a $4.8 million increase in the collection of balancing and memorandum accounts. These increases were partially offset by a $5.7 million increase (sic) [decrease] in net taxes payable and $1.9 million of a decrease in previously billed and accrued receivables. At the end of the quarter, we had $90 million available on our bank lines of credit for short-term financing of utility plant additions and operating activities.

With that, I will 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 second quarter. During the period, we worked with the California Public Utilities Commission and its Consumer Protection staff to reach a fair resolution regarding its review of San Jose Water's past billing practice. As previously reported, San Jose Water received approval and has refunded to customers approximately $2 million. That amount representing proration of service charge, rate changes for the period of June 2011 through 2016. And as Jim noted in his remarks, further discussions with the Consumer Protection and Enforcement Division had resulted in a settlement agreement that, if approved by the CPUC, resolves all issues with the OII into our past service charge billing practice.

Key provisions of the settlement agreement include: a refund of $1.76 million for the period of 1987 through May of 2011; an additional $350,000 payable to customers currently on the Water Rate Assistance Program, raising their one-time credit to $25 per customer and a future $5 million capital investment into our water system, which will not be recovered from customers. We believe this is a fair outcome and allows us to move forward and continue focusing on rebuilding and strengthening our relationships with our customers.

Additionally, on June 19, 2019, the CPUC issued its final decision resolving the remaining issues in San Jose Water's general rate case. While the decision denied the water revenue adjustment mechanism and related sales reconciliation mechanism, it did authorize the recovery of the hydro generation research, development and demonstration memorandum of account balance of $1.2 million. Per the decision, San Jose Water will file an advice letter to recover this amount over a 3-year period.

Turning to Texas. The 86th Texas Legislative Session produced 2 pieces of legislation that we believe are positive developments for the investor and utility industry at large and SJWTX more specifically. These 2 pieces of legislation will take on -- will take effect on September 1, 2019, and are known as SB700 and HP3542. SB700 paves the way for a system improvement charge similar to the distribution system improvement charge currently available in Connecticut and Maine and a handful of other states and which will greatly assist investor-owned utilities in recovering costs associated with replacing aging or failing pipes and facilities without having to wait until the next general rate case.

HP3542 allows a utility in Texas to value acquired assets at fair market value for ratemaking purposes. Importantly, the legislation enables municipalities to tap into the investor-owned utility industries' operational expertise and investment capabilities to ensure the continued provision of safe and reliable water and wastewater services. This bill also includes language that will help identify failing utilities and could facilitate a wave of consolidation across the state. With a more constructive regulatory environment and our track record of growth, both organically and through acquisitions, we remain optimistic about the prospects for SJWTX.

Turning to our overall business. SJW Group currently operates 2 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. Through the added advantages of national scale as well as geographic and regional diversity, our combination with Connecticut Water will be a big driver of our future success as 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 in profitability, earnings and dividends.

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

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

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Can we start with the impact of the sort of the -- you mentioned the RAM -- they dislodged the RAM in the rate case. What impact does that have on the business? Can we just start there? Can you elaborate that for me a little bit?

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

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This is Jim, Durgesh. So if you remember, we currently do have in place a Water Conservation Memorandum Account that was put in place in 2016, I believe, in response to then droughts that were occurring in the California operating region of the company. And to that extent, we continue to operate under a call for 20% conservation by the Santa Clara Valley Water District, which is our primary water supplier as well as ongoing restrictions at the state of -- water resources control board at the state level. And so that mechanism continues to be in place and continues to help us as we manage driving the conservation message, which is really the chief influencer, if you will, in terms of water usage. So at least currently, we have in place an effective device that, otherwise, would serve the same purpose as a full decoupling mechanism. In the meantime, as we've navigated through our most recent rate cases, the actual usage number, the authorized usage number has become more in line with the actual usage number that is kind of more reflective of this new conservation level of usage that we've experienced in the last few years.

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

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Okay. All right. Maybe we can follow-up on that after the call, Jim. Just can I -- when the -- on your time line for the close for Q3 19, this is the merger application that I am talking about, what are your thoughts on the potential California review? Have you factored that in into this time line?

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

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Thank you, Durgesh. This is Eric. I appreciate your call and your interest. As we state, we are in our queue, we're not able to predict exactly what the California Public Utilities Commission will do, but we do believe based on prior precedent and practice that there is no prior approval authorization from the CPC required. If you just think about other investor-owned water utilities in the state making acquisitions in other states, there is no approval process required there. So we do feel confident in that. But that being said, we respect their interest in the process, and we will work with them and cooperate, make sure that they have all the information that they need. And it is our expectation that it will point to the next general rate case and to make sure that there are no negative impacts on California customers. And in fact, we look forward to the opportunity to demonstrate the positive benefits for California customers as well. So we'll work cooperatively with California PUC, as always, but again we do not believe that any authorization is required or approval of this transaction. And just to put a point on it, you'll recall that the OII was really -- began when we first announced the transaction under a merger of equals model and there was quite bit of noise in the marketplace, an interloper came about. And so there was interest in the transaction, and then, of course, when it was changed to an outright acquisition of CTWS, that changed the premise of the transaction as well. So all that considered, we think this will get resolved efficiently and effectively, and we can proceed forward with close, once we receive regulatory approvals in Connecticut and Maine.

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

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Got it. So but just to be clear, the OII, that is still not over yet, right? I mean, I guess, like your sense is that once it's resolved in Connecticut and Maine, then that OII basically kind of starts from that point on? Or what's -- do you have a sense of where -- is there going to be -- I guess, what I'm trying to ask is, are you -- do you need a formal decision from California to complete the acquisition?

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [7]

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So the OII was suspended earlier in the year, I believe, it was in March, and the intent was then to sort of restart that OII once the regulatory approval processes in the other states were completed. But we do not believe that OII has to be completed in order for us to close. We believe that the OII will point towards the next general rate case of San Jose Water to address any potential implications for California customers. But again, as I stated, we're in queue, we're not able with absolute certainty to predict what the California PUC will do. That's just the nature of the regularly construct. But we will work together with them, cooperate, make sure they have all the information. But again, we're very confident that we will have benefits to reflect for California customers.

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Operator [8]

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Our next question comes from Jonathan Reeder of Wells Fargo.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [9]

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Eric, what would you think the prospects of CPUC approval of this OII settlement into the billing practices is? Should we be concerned there at all that WRATES is not on board?

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [10]

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We feel optimistic. Both parties, of course, will support the settlement. And we were able to, as your know, settle the earlier period and get that refund approved by the commission. So I believe this is in the same spirit of that. So I am optimistic and look forward to chance to get in front of them and share with them the settlement and support it. So yes, I feel very good about it.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [11]

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Okay. So you're saying like WRATES hasn't even had a chance to say whether they support it or not at this juncture?

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [12]

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WRATES did participate in the call with the hearing examiner and the settlement parties and so they're fully aware of it. I've not heard a specific position stated by them. But again, we do feel that it is a fair settlement and we'd hope that they would join us in that feeling and support the settlement.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [13]

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Okay. And when you pay the earlier settlement, that was what was already included in 2018 GRC approval last year, correct?

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [14]

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That's right. That was the refund we made earlier this year for the period of 2011 through 2016. It's just -- maybe remind or inform listener who hasn't listened in, this really stems from an interpretation of the company's tariff over the years where we didn't prorate the fixed service charge at the point in time when rates were changed. And that we now know was an error. It wasn't a system error, it was really just an error of interpretation. And the settlement, we think, is fair and right, and we've asked our customers -- we've apologized to them for this error that we made. We refunded, I believe, it was $6.36 per customer for that period of 2011 to '16 and for the period of over '87 to 2010, it is actually, I believe, a little bit little less than that. So over the period of years, you're looking at about $11, $12 a customer.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [15]

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Right. Okay. And then do you have any updated Connecticut Water merger accretion expectations in light of the settlement reached in Connecticut? Or can you just let us know what your latest thinkings are around accretion?

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [16]

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Absolutely. As we've said before, we do expect a very mild dilution or a neutral effect in that first full year after close and high single-digit accretion in the second full year. And this is primarily driven by the delay in the Connecticut Water rate case, not the commitments and rate credit that we put up front. That rate case -- their last rate case was in 2010 and they were going to file in 2019. And so with our commitments and this process, they would expect to file in 2020 with new rates in 2021. And that's the primary driver of that delay.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [17]

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Okay. And then any sense when Governor Lamont might appoint new PURA commissioners and perhaps we get clarity on the current commissioner that is serving beyond his current term?

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [18]

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Jonathan, I'll circle back to you on that last phrase. I was thinking that the commissioners have been reappointed. But let me circle back and make sure we have that accurate. But I have no -- I've not heard nor have my colleagues at Connecticut Water heard any new developments on new commissioners.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [19]

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Okay. Okay. And then I know the response as to the OPA's testimony in Maine we're doing yesterday, but -- and indeed see anything new posted to the doc. Was your supplemental testimony essentially your response to the OPA's?

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James Patrick Lynch, SJW Group - CFO & Treasurer [20]

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So we did -- we have some rebuttal testimonies that is to be filed next week. But both I and Rick Knowlton, the President of Maine Water, had filed some supplemental testimony, I believe, last Friday. And so that should be out there and available.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [21]

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Right. I mean, that essentially kind of outlines what you rebuttal testimony, I guess, position will be.

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [22]

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Yes. We'll -- and we continue, of course, to engage in settlement discussions in Maine. As I mentioned, they've not put forth a final date for receiving an order. They have expressed that they don't intend to hold up our closing And they want to get their results through as close to Connecticut Water as possible. And we're also working on a settlement track there. We've had a number of meetings, as you know, and I pointed out. And we're really making good progress there. But Maine wants to make sure that they don't get ahead of Connecticut, which we understand the reasons for that. So we still think that we could get an order in September, sufficient in time to close in the third quarter.

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

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Okay. And then lastly, on the Texas legislative update. What's the process and time line for the DSIC and fair market value legislation getting implemented?

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [24]

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Yes. That's a good question. We'll need to work with the staff and the team at the Public Utility Commission in Texas to help formulate the actual regulatory process then. The bills themselves were more designed to enable the commission to enlist these new regulatory tools, but aren't specific enough for the commitment to simply implement them, at least in my judgment, and I think in some preliminary conversations we've had with them. So they're interested in engaging and hearing from the industry as well. And so I would suspect you won't see any benefits of this in 2019, probably more likely in 2020.

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

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Okay. Perhaps that would be in place in 2020 and then we can hopefully move forward there. So...

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [26]

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Yes, we're very excited about...

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

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Go ahead.

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [28]

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We're just really excited about the fair market value component. That will be a real nice tool there. There are many small, medium-sized municipal systems that, I think, would be interested in speaking with investors-owns. And then for our system, in Texas, we -- it's relatively new. It grows rapidly, and so the distribution system improvement charge might not benefit us as much in the early years, but we're real glad to have that tool later on as we move more into a replacement era. But now it's just keeping up with the growth there now.

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

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Yes. And in that vein, that's what I was going to say. It might be a little too early that since there's not actual rules in place, but have you seen those conversations from the small- and medium-sized systems start to happen? Or is it just too early at this juncture?

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [30]

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Yes, it's really early. And until we get some clarity on how the commission will approach that, we'll need that as well, but the ability to go speak with municipality and now talk in different terms in terms of what their system is worth, as you know, for communities that aren't interested in managing utility infrastructure, it can be a real opening now for us and the other players in the industry. So -- but recognizing that the PUC really needs to get the hard work done so that all of those regulations are clear to all parties.

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

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Good luck with all the pending regulatory matters you got on your book.

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

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Yes, great. We really appreciate it. We're excited to be nearing the end and that's been a lot of hard work by a lot of people, but I really appreciate your interest and support as well.

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Operator [33]

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Our next question comes from the line of Michael Gaugler of Janney Montgomery.

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Michael E. Gaugler, Janney Montgomery Scott LLC, Research Division - MD of Utilities & Infrastructure and Senior Analyst [34]

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I also got a question on fair value in terms of Texas. I mean, I know you guys are out there looking at acquisitions all the time. Is there just kind of a sense of right now both on your side and on the potential target side that you wait for this versus just trying to get something done now? And is that kind of a general understanding in that market?

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [35]

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I think, Mike, just in order to have more regulatory certainty and clarity around how premiums would be treated in effect, it wouldn't be -- I guess, probably not a proper term is the premium, but obviously the change in value that you can pay such that you would want to have some clarity and now the commission would view that and what they would be most interested in seeing to support it. So I do think it's important to work with them and get that right. And so that as an industry and as working with the regulators, we get results that don't cause any controversy and everybody has clarity in terms of what they're looking for.

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

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Yes. I don't think that there's a wait-and-see necessarily attitude in Texas to get -- to wait until the final regulations come out. Certainly, if folks are interested in doing something with their systems, the small or medium-sized systems, there are existing avenues for which they can approach folks who may be interested in acquiring those systems. So I think what you're more likely to see is a potential acceleration once the legislation does comes out. But I don't think things are necessarily on hold right now in Texas and waiting for that to occur.

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Michael E. Gaugler, Janney Montgomery Scott LLC, Research Division - MD of Utilities & Infrastructure and Senior Analyst [37]

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All right. And then just one other one, an income state item. I know this, you mentioned purchase water and power costs were up. I took a look back through and we were paying somewhere between $6 million and $7 million annually on purchase power costs. I am just wondering does it make sense, are power prices high enough in California where maybe you take a look at doing some of your own generation to lower those bills?

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

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One of the things that we have applied for in our more recent rate cases has been solar projects within some of our more sizable plants there. And in each case, at this point, there's been not a lot of interest by the California Public Utilities Commission to allow us to move forward on those particular projects in favor of other projects that they prioritized higher. So I think as we continue to see the power cost increase, certainly we would look to alternatives, such as solar and potentially turbine-generated power to offset some of our future costs. But we really could only undertake those types of projects with the support of the commission.

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Michael E. Gaugler, Janney Montgomery Scott LLC, Research Division - MD of Utilities & Infrastructure and Senior Analyst [39]

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Interesting. I mean, I thought about it. I didn't realize that the commission would play an integral role in that. I don't know -- look, I don't know what's around your major centers of power usage, but just wondering if you could go on with someone else and generate and just -- if they're indifferent or neutral on it, just build it, and maybe build it to a scale where you're splitting the power with someone else and using the grid as a backup because it doesn't look like power prices are going to getting cheaper anytime soon in California.

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [40]

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Yes. You raised a good point. I guess, we do have, of course, the benefit of recovering those costs. And Jim was really referring to, as part of GRC, the 3-year forward -- look, you put forward all of the CapEx that you would carry out. We had this hydro generation experiment, if you will, that we went through and we did recover that, but the results of that weren't terribly promising. But we're always looking at ways to reduce expenses and share those benefits with customers. So we'll remain open-minded to those items as well.

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Operator [41]

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(Operator Instructions) And as there appear to be no further questions in queue, I'd like to turn the call back over to CEO Eric Thornburg for any closing remarks. Sir?

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Eric W. Thornburg, SJW Group - Chairman, President & CEO [42]

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Yes. Again, thank you, operator. And thank you, everyone, for participating in the call today and your questions. We're always available to talk. If you have any further follow-ups, please don't hesitate to let us know. We appreciate your support, and we're really proud our progress and executing on our growth strategy. And we look forward to talking you in the near future. Thank you very much.

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James Patrick Lynch, SJW Group - CFO & Treasurer [43]

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Thank you.

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Operator [44]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may disconnect your lines at this time.