H2O AMERICA quarterly report, Q2 FY2021

Business context and reporting period

SJW Group (NYSE: SJW) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. It provides regulated water utility services in California, Connecticut, Maine and Texas, alongside smaller non-tariffed and real-estate businesses. Water sales are seasonal, so interim results may not indicate full-year performance.

Entity discrepancy: The request identifies H2O America, but the filing is for SJW Group. Confirm that this is the intended company and filing.

Financial performance and position

Amounts below are in millions of dollars unless noted.

For the six months, operating cash flow was $67.1 million, versus $32.3 million a year earlier. Investing cash outflow was $107.0 million, including $100.1 million of company-funded utility-plant additions; financing cash inflow was $58.7 million. The company reported $25.4 million of cash and $121.5 million of unused short-term credit capacity at June 30.

At June 30, total assets were $3.41 billion and stockholders’ equity was $989.7 million. Long-term debt, including its current portion, was $1.398 billion; line-of-credit borrowings were $138.5 million. The company reported covenant compliance. Cash dividends were $0.34 per share in Q2; the board declared another $0.34 quarterly dividend for payment in September.

Material changes versus the prior comparable period

• Q2 revenue increased 3%, while operating income fell about 10%; six-month revenue rose 2%, while operating income fell about 11%.
• Net income rose 5% in Q2 and 6% for the six-month period despite lower operating income. Lower income-tax expense contributed, and both 2021 periods included a $3.0 million pretax gain from receipt of a Texas Water Alliance sale holdback.
• Operating costs increased: Q2 operating expense rose $8.5 million, driven notably by administrative and general expense, water production and maintenance. Lower surface-water availability and higher customer usage increased production costs.
• Six-month operating cash flow rose by $34.8 million, supported by improved collections and working-capital timing, among other factors. Company-funded capital expenditures increased from $74.1 million to $100.1 million.
• A March equity offering generated approximately $66.8 million net proceeds. Shares outstanding increased to 29.8 million from 28.6 million at year-end 2020.

Outlook, management commentary and risks

• No consolidated earnings guidance is provided. Management budgeted approximately $238.8 million of 2021 Water Utility Services capital expenditures, excluding customer-funded projects; $100.1 million had been invested by June 30. Planned five-year capital expenditures are approximately $1.4 billion, a significant portion subject to regulatory approval.
• Severe drought materially constrained California surface-water supplies. Valley Water declared a shortage emergency and called for 15% conservation; SJW sought activation of Stage 3 restrictions. Management said available sources should meet customer demand through the remainder of 2021, while noting the importance of supply mix and low-cost surface water.
• Rate cases and regulatory actions remain significant to results. Pending or recently decided matters include SJWC’s 2022–2024 general rate case and cost-of-capital applications, and Connecticut Water’s rate case. Proposed increases are requests, not assured recoveries.
• COVID-19 may continue to affect customer collections, commercial usage, operating costs and projects. Disconnection moratoria were extended in California through September 30, 2021; recovery of tracked pandemic-related costs and revenue impacts is not guaranteed.
• Other risks include weather and water availability, regulatory decisions, infrastructure failures or contamination, interest rates and access to financing, pension assumptions, and the uncertain outcome of acquisitions. The proposed Kendall West and Bandera East Texas utility acquisition remained subject to regulatory approval.
• Management reported no pending litigation expected to have a material effect and no material change in previously disclosed risk factors other than the expanded COVID-19 risk discussion.

Investor verification points

1. Verify the company identity: this filing is SJW Group, not H2O America.
2. Assess underlying earnings apart from the one-time $3.0 million holdback gain and the lower effective tax rate.
3. Track drought conditions, conservation-driven usage, water-supply costs and the status of related regulatory recovery mechanisms.
4. Monitor outcomes and timing of rate cases, capital approvals, and recovery of COVID-19 balances and customer arrears.
5. Review capital-spending needs, debt and variable-rate exposure, available credit, and the funding required to sustain dividends.