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Text: I will be presenting today with Eric Thornburg, Chairman of the Board, President and Chief Executive Officer; and Andy Gere, President and Chief Operating Officer of San Jose Water Company.
For those who would like to follow along, slides accompanying our remarks are available on our website at www.
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.
I will now turn over the call to Eric.
I am Eric Thornburg, and it is my honor to serve as Chairman, President and CEO of SJW Group.
We're now more than 13 months into the COVID-19 pandemic.
There is a sense of cautious optimism that the worst is behind us, and we have begun planning for the safe return to our offices and work centers.
Over the past year, we've learned much about our teams, our culture, how we can adapt and what we can achieve through remote work.
Despite the challenges, our people have personified our mission, trusted professionals passionate about delivering life-sustaining, high-quality water and exceptional service to families and communities while protecting the environment and providing a fair return to shareholders.
Looking ahead, we are preparing for a phased return to our offices and work sites, building on our established risk-based process that has served us well during the past year.
We will adhere to the safety guidelines provided by our national, state and local health authorities.
Our goal remains the same as it has been throughout the pandemic to deliver on our public health mission as a water service provider and protect our employees, customers and communities.
I and the rest of our executive leadership team are looking forward to the day when we can express our appreciation to all employees in-person and meet the new employees, who have joined our team over the past year without having set foot in our offices.
We are committed to a safe return that seizes the benefits of remote work while providing a safe physical environment to nurture collaboration and our culture.
The extreme cold and winter weather experienced in Texas last February proved the benefits of a pure-play water and wastewater utility with national scale, geographic diversity and locally focused operations.
SJW Group was able to draw on resources from our operations on the East and West Coast to assist our Texas operation during the event.
Our communications teams from both coasts assisted with customer notifications as well as website, social media and news media updates, while our operations and safety teams provided valuable incident support.
The direct experience of the Connecticut and Maine teams dealing with cold weather events added to our response.
In California, the rainfall season is largely behind us.
We have experienced lower-than-normal precipitation for the second consecutive year, and that is impacting available surface water supplies produced from our watershed.
A very low precipitation that we have experienced in the Santa Cruz Mountains this winter has had a significant impact on our local surface water operations, both in terms of storm runoff collected at the creek intakes for immediate treatment as well as the volume of water that we've been able to impound in our Lake Elsman reservoir for release later in the year.
For the first time in my 25 years at San Jose Water, we are temporarily taking our Montevina Water Treatment Plant offline due to low supply.
We will bring the plant back into service when hydrologic conditions allow.
To provide some perspective, the chart on Slide 10 shows the historic surface water production in blue compared with the associated rainfall at Lake Elsman in red over the same period.
As you can see, there's been just one other year, 2014, where we saw such low levels of rainfall and surface water production.
Fortunately, the regional water supply picture is somewhat better, and despite the low rainfall and snowpack this winter, the total groundwater storage at the end of the first quarter remained at Stage one or normal of Valley Water's water shortage contingency plan.
Based on available recharge and the current rate of withdrawal.
Valley Water reports that it is forecasting to remain in the normal range through year-end by supplementing normal supplies with additional imported water.
That bodes well for the upcoming summer months when demands are typically highest, and we anticipate adequate supplies to serve our customers.
As a result of the water supply situation in California, we anticipate increases in our operating costs through the reliance on purchase water from our wholesaler to meet our customers' needs in 2021.
Currently, every billion gallons of purchased water has an incremental cost to the company of $4.2 million more than using our own supply sources.
As a direct result of the water supply outlook and in full transparency, we are announcing guidance of $1.85 to $2.05 per diluted share in 2021.
This assumes no additional company produced surface water in California for the remainder of 2021.
We are in the process of updating our strategic water supply plan to evaluate current and future supply reliability and resiliency.
Our current California general rate case proceeding will address the impact of surface water availability.
The prudent management of our business and financial resources continues to be fundamental to our growth and our ability to return capital to shareholders.
We are proud to have continuously paid a dividend for over 77 years and to have increased the annual dividend in each of the last 53 years, delivering value to our shareholders.
After Jim's remarks, I will address regulatory and other business matters.
Our first quarter operating results reflect new revenues authorized by our 2019 California general rate case.
Water infrastructure conservation adjustment and water infrastructure surcharges authorized in Connecticut and Maine and customer growth in Texas.
These increases were offset by a decrease in customer usage, the impact of a February ice storm in Texas and a decrease in available low-cost surface water due to the dry weather conditions in California that Eric and Andy just discussed.
First quarter revenue was $114.8 million, a 1% increase over the first quarter of 2020.
Net income for the quarter was $2.6 million or $0.09 per diluted share, an 8% increase over net income of $2.4 million or $0.08 per diluted share reported in the first quarter of 2020.
The increase in diluted earnings per share for the quarter was primarily attributable to cumulative rate increases of $0.08 per share, cumulative cost savings of $0.04 per share, a tax benefit of $0.04 per share and an increase in nonregulated income of $0.03 per share.
The diluted per share increase was partially offset by a decrease in customer usage of $0.08 per share.
Customer credits in Texas totaling $0.02 per share issued in connection with the February Ice storm, a decrease in the availability of surface water of $0.02 per share and an increase in depreciation and amortization of $0.06 per share.
Our revenue decrease was a result of $2.8 million in decreased customer usage.
In addition, customer credits in Texas reduced revenue by $700,000 and net changes in certain balancing and memorandum accounts reduced revenue by $600,000.
These decreases were partially offset by $2.8 million in cumulative rate increases and $500,000 in revenue from new customers.
Total 2021 first quarter water production costs were slightly lower when compared to the first quarter of 2020.
The minor reduction was primarily due to $800,000 in lower average per unit cost for purchased water, groundwater extraction and energy charges and lower usage, partially offset by a $700,000 increase due to the purchase of additional water supplies to supplement the lower level of surface water production we experienced during the quarter.
Other operating expenses increased $1.6 million or 2% for the quarter, primarily due to $2.1 million in higher depreciation related to utility plant additions, and $200,000 in higher maintenance expenses, partially offset by $400,000 in lower general and administrative expenses.
In addition, in the first quarter of 2020 we incurred $400,000 in merger-related expenses.
No similar expenses were incurred in 2021.
The effective consolidated income tax rates were approximately negative 52% and 15% for the quarters ended March 31, 2021 and 2020, respectively.
The lower effective tax rate for the quarter ended March 31, 2021, was primarily due to excess tax benefits relating to share-based payment awards, state tax credits and other discrete tax items.
Turning to our capital expenditure program.
We added $46.7 million in company-funded utility plant during the first quarter of 2021.
This represents 20% of our total 2021 planned capital expenditures.
From a financing perspective, first quarter 2021 cash flows from operations increased 321% over the first quarter of 2020.
This change was primarily the result of a decrease in accounts payable and accrued expenses of $8.3 million, an increase in accounts receivable collections of $2.2 million and a $1.5 million increase in net income adjusted for noncash items.
In addition, in 2020, we made an upfront payment of $5 million to the city of Cupertino in connection with our service concession agreement and refunded $8.4 million to California rate payers that were accumulated in our 2017 Tax Act Memorandum Account.
No similar payments were made in 2021.
In March 2021, SJW Group issued approximately $1.2 million -- I'm sorry, 1.2 million of new shares in an offering that raised net proceeds of approximately $66.9 million.
Proceeds from the offering were used to repay outstanding balances on the company's credit facilities and for general corporate purposes.
In addition, in April 2021, the company's California subsidiary entered into a $140 million credit agreement, and the company's Texas subsidiary entered into a $5 million credit agreement, both with JPMorgan Chase Bank.
The new credit agreement replaced the existing JPMorgan Chase credit agreements, which have been paid off and were set to mature and expire on June 1, 2021.
At the end of the first quarter, we had $138 million available on our bank lines of credit for short-term financing of utility plant additions and operating activities.
The average borrowing rate on line of credit advances during the quarter was 1.42%.
SJW Group continues to execute on our core growth strategy of investing in high-quality water systems to provide safe and reliable water service to customers and communities and earning a fair return on those investments.
As Jim just mentioned, we have already invested approximately 20% of our planned 2021 capital spending through the end of the first quarter.
We have high-quality water systems throughout our service areas and are investing to sustain them for the benefit of customers, communities and shareholders.
Other regulatory developments in the first quarter include the filing of general rate cases for both San Jose Water and Connecticut Water in January.
San Jose Water's GRC application proposes a $435 million capital program for the years 2021 through 2023, supported by our award-winning enterprise asset management system.
New rates are expected to be effective in the first quarter of 2022.
California employs a future test year, and thus, the level of capital spend is authorized during each general rate case cycle.
Connecticut, Texas and Maine, employ a historical test year, where capital investments not otherwise recoverable through surcharge mechanisms and expenses are recovered in subsequent general rate case filings after they have been incurred.
Connecticut Water's general rate case is the first since their last decision in 2010.
A primary driver of the case is the $266 million in infrastructure investments that have been completed and are providing a benefit to customers, but are not yet covered in rates.
The Connecticut Public Utilities Regulatory Authority, or PURA, is expected to issue a decision in the third quarter.
Connecticut Water rate case also includes tiered rates for residential customers that promote water conservation.
In Connecticut, PURA-regulated water utilities are able to collect their authorized revenues regardless of usage through the water revenue adjustment mechanism, which mitigates risk of such a rate design and support state policy goals for conservation.
A 1.1% increase in the Water Infrastructure and Conservation Adjustment surcharge, or WICA, was authorized by PURA earlier this year and went into effect on April 1.
This covers $8.7 million in qualified infrastructure investments that have been completed and will provide incremental annual revenue of about $1 million.
The current cumulative WICA surcharge will be rolled into base rates, and the surcharge will be reset to 0 as part of the general rate case.
Maine Water filed a general rate case application for its Biddeford Saco rate division, requesting a $6.7 million increase in annual revenues with the Maine Public Utilities Commission, or PUC, in March.
The application is driven by a $60 million replacement of the 1,884 vintage drinking water treatment plant.
Maine Water's application includes an innovative proposal that would spread the increase over three years in roughly equal amounts.
A decision on the rate smoothing mechanism to authorize a customer surcharge, starting in the third quarter of 2021 is expected in the second quarter and a decision on the requested revenue increase is expected in the second quarter of 2022, in alignment with the completion of the new water treatment facility.
These various state regulatory filings include capital investments that over the long term benefit customers, communities and shareholders as they enhance our ability to deliver safe, high-quality and reliable water service while increasing rate base, the earnings engine for the company.
We are mindful of the economic impact that COVID has had on some of our customers over the past year.
Connecticut Water is proposing a 15% discount on water bills for income-eligible customers that is similar to a program offered by San Jose Water since late 2005.
Meanwhile, San Jose Water anticipates proposing a debt forgiveness plan for its Water Rate Assistance Plan, or WRAP, or low-income -- for low-income customers.
The proposal includes tracking the forgiven amount in San Jose Water's WRAP balancing account for potential future recovery.
On April 9, SJWTX, our Texas Water and Wastewater Utility, executed the closing agreement to acquire the Clear Water Estates Water System.
This is the first acquisition completed by a regulated water utility under the state's new fair value -- fair market value regulation.
The acquisition added 230 new customers, gained additional water supplies to serve current and future customers and added rate base that reflects market value for future rate making purposes.
More importantly, the acquisition demonstrated that the fair market value process worked as envisioned.
This was the 13th acquisition completed by SJWTX, which has tripled its customer base since 2006.
The company serves two of the top four fastest-growing counties in the United States.
With a diverse portfolio of letter supplies and continued additions to customer base through organic growth and acquisitions.
We remain optimistic about the prospects for SJWTX and its increased contributions to consolidated earnings.
We are committed to investing in our culture, diversity and the environment.
Our diversity, equity and inclusion council has honestly and authentically guided our commitment to further build on our diverse and inclusive culture.
We have goals to expand our supplier diversity programs so we can extend our efforts into the broader community.
At the Board level, SJW Group is just one of 154 companies in the Russell 3000 to achieve a gender balanced board rating in 2020.
According to the 50/50 Women on Boards Gender Diversity Index.
We've set the foundation for creating a comprehensive greenhouse gas inventory across all of our operations, understanding where we are now will allow us to set meaningful reduction goals for the future and develop prudent plans that will serve as a road map to achieve those goals.
Bob has served as a Director of the company since 2006 and as Lead Independent Director since 2015.
Bob's knowledge of the water industry is second to none and his contributions to our company and stockholders are too long to list.
Moreover, you won't find a person in business with more integrity, character and a genuine commitment to serve our company, customers, employees and communities than Bob.
On behalf of the Board and all of our employees, we wish him the very best.

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sees fy earnings per share $1.85 to $2.05.
q1 earnings per share $0.09.
q1 revenue $114.8 million.

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