Business context and reporting period
This is SJW Group’s unaudited Form 10-Q for the three months ended March 31, 2023. SJW Group operates regulated and non-tariffed water and wastewater utilities in California, Connecticut, Maine and Texas, as well as real estate services. Water sales are seasonal, so first-quarter results are not necessarily indicative of full-year performance.
Filing identity: The request metadata names H2O America, but the filing identifies the registrant as SJW Group (NYSE: SJW).
Financial results and condition
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $137.3 | $124.3 |
| Operating income | $25.2 | $16.6 |
| Net income | $11.5 | $3.7 |
| Diluted EPS | $0.37 | $0.12 |
| Operating margin | 18.3% | 13.3% |
| Net margin | 8.4% | 3.0% |
| Operating cash flow | $50.6 | $45.3 |
| Company-funded utility plant additions | $52.4 | $43.7 |
| Dividends per share | $0.38 | $0.36 |
Operating cash flow less company-funded utility plant additions was negative $1.8 million, before developer contributions and other investing items. Cash and cash equivalents were $23.3 million at March 31, 2023, up from $12.3 million at year-end 2022. Current assets were $193.8 million versus current liabilities of $213.0 million. Long-term debt, including its current portion, was $1.565 billion; lines of credit outstanding were $72.4 million. The filing reports $277.6 million of unused credit facilities. SJW issued shares for net proceeds of $41.0 million during the quarter.
Material changes versus the prior comparable period
- Revenue increased $13.0 million, or 10%, primarily from California and Maine rate increases, partly offset by lower consumption and unbilled revenue.
- Net income rose $7.8 million, or approximately 209%. Management cited rate increases, the timing of SJWC’s general rate case, and lower depreciation and amortization; comparison was also affected by a $5.45 million gain on nonutility property recognized in Q1 2022.
- Operating expenses increased $4.4 million, or 4%. Production expenses rose $0.7 million as lower usage and greater surface-water availability were offset by higher unit costs and other factors.
- Interest expense increased to $15.8 million from $13.7 million. The average cost of borrowing on credit lines rose to 5.74% from 1.64%.
- Cash from operations increased $5.3 million, while investing cash use rose to $55.0 million from $49.4 million, reflecting higher utility-plant investment.
Outlook, management commentary, risks and unusual items
- No consolidated earnings guidance is provided. Water Utility Services expects approximately $255 million of 2023 company-funded capital expenditures; about $52.4 million had been invested by March 31. The five-year capital expenditure outlook is approximately $1.35 billion, with a significant portion subject to regulatory approval.
- Management stated SJWC expects its water supplies to be sufficient to meet 2023 demand. Following improved California water conditions, Valley Water rescinded its water-shortage emergency and mandatory conservation target in April; SJWC lowered its drought response to Stage 1. SJWC’s request to continue certain conservation-related tracking accounts remained pending before the CPUC.
- Rate actions include approved Connecticut infrastructure-related revenue increases and Maine rate decisions. SJWC’s request to recover a $14.2 million Monterey mechanism under-collection and Texas Water’s system-improvement charge application were pending. Maine Water filed for a further $2.9 million revenue requirement increase for its Biddeford-Saco division.
- Texas Water agreed to acquire two Texas water-related businesses for stated purchase prices of $7.3 million and $53.5 million; the transactions were expected to close in Q3 2023, subject to approvals.
- SJW Land Company reclassified Tennessee properties as held for sale, recorded at $40.9 million, with no impairment. The sale was not treated as a discontinued operation. Q1 2022 included the $5.45 million gain on a prior nonutility property sale.
- Management cited regulatory decisions, water demand and weather, water supply and infrastructure, climate change, interest rates and access to financing, cybersecurity and catastrophic events among risks. The filing reported no material change from previously disclosed risk factors and no litigation expected to have a material effect.
- The effective tax rate was 9%, versus 22% in Q1 2022, primarily due to discrete tax items. SJW reported no material change in critical accounting policies, and stated it was in compliance with credit-facility covenants.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is SJW Group, not H2O America.
- Track CPUC and other regulator decisions affecting rates, cost recovery, conservation accounts and planned capital investment.
- Assess the sustainability of earnings growth, including the effect of rate increases, lower consumption, prior-year sale gains and one-time depreciation effects.
- Monitor capital spending, financing needs, interest costs, share issuance and dividend coverage.
- Follow the Texas acquisitions and their closing conditions, as well as California water supply, conservation and customer collection trends.