SJW Group — Q1 2021 Form 10-Q
Filing identity: The supplied filing is SJW Group’s Form 10-Q, not a filing identified as H2O America. It covers the three months ended March 31, 2021; financial amounts below are in millions of dollars unless otherwise stated.
Business context and reporting period
SJW Group provides regulated water utility services in California, Connecticut, Maine, and Texas, alongside smaller non-tariffed services and real estate activities. Water sales are seasonal, and first-quarter results are not necessarily indicative of full-year performance.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $114.8 | $115.8 | Down 0.8% |
| Operating income | $13.1 | $15.4 | Down 15.2% |
| Operating margin | 11.4% | 13.3% | Down 1.9 percentage points |
| Net income | $2.6 | $2.4 | Up 8.2% |
| Diluted EPS | $0.09 | $0.08 | Up $0.01 |
| Operating cash flow | $33.4 | $7.9 | Up $25.4 |
| Capital expenditures, company-funded | $46.7 | $38.3 | Up $8.4 |
Net income rose despite lower operating income, primarily reflecting an income tax benefit of $0.9 million versus tax expense of $0.4 million a year earlier. The 2021 effective tax rate was negative 52%, mainly due to share-based payment tax benefits, state tax credits, and other discrete items. Interest expense was $13.4 million, compared with $13.3 million.
Operating cash flow exceeded company-funded capital spending by approximately $13.3 million, before other investing activity, dividends, and financing. Investing activities used $51.9 million; financing activities provided $23.8 million. Cash and cash equivalents were $11.4 million at quarter-end, plus $3.1 million of restricted cash. Current assets were $123.5 million and current liabilities were $289.7 million.
At March 31, 2021, long-term debt including its current portion was $1,379.3 million; line-of-credit borrowings were $121.5 million, for total debt of approximately $1,500.8 million. Unused short-term credit lines totaled $138.5 million. The company issued shares in March and reported $67.2 million of net common-stock issuance proceeds in the cash-flow statement; proceeds were used to reduce line-of-credit borrowings and for general corporate purposes. The quarterly dividend was $0.34 per share, versus $0.32 a year earlier.
Material changes and management commentary
- Revenue declined by $1.0 million. Rate increases contributed $2.8 million and customer growth $0.4 million, offset by lower consumption of $2.8 million, winter-storm customer credits of $0.7 million, and lower balancing-account revenue.
- Operating expenses increased $1.4 million. Depreciation and amortization rose $2.1 million as assets placed in service expanded; lower administrative costs and the absence of $0.4 million of prior-year merger expenses partly offset the increase.
- Operating cash flow improved substantially, reflecting working-capital and regulatory-account movements, prior-year payment of a $5.0 million service-concession fee that did not recur, and increased customer collections. Management cautions that the comparison is affected by timing and working capital.
- Water Utility Services generated $113.4 million of revenue. California drought conditions reduced available lower-cost surface water, increasing reliance on other supplies. Management said available sources were expected to meet demand through the remainder of 2021.
Outlook, regulation, risks, and contingencies
- Capital program: 2021 Water Utility Services company-funded capital expenditures were budgeted at approximately $238.8 million; $46.7 million, or about 20%, had been invested by quarter-end. Planned five-year capital expenditures were approximately $1.4 billion, with a significant portion subject to regulatory approval. No consolidated earnings guidance is provided in the supplied filing text.
- Rate proceedings: SJWC’s California general rate case seeks revenue increases of $51.6 million in 2022, $16.9 million in 2023, and $19.2 million in 2024; decisions were expected after a review process, with proposed new rates expected in early 2022 if approved. Connecticut Water sought an annual revenue increase of $20.2 million, with a decision expected in Q3 2021. Maine Water sought a $6.7 million increase for its Biddeford Saco division; a decision was expected in Q2 2022.
- Water supply and weather: Valley Water reservoirs were at approximately 17% capacity as of April 1, 2021, and California rainfall was below average. SJWC reported very low Lake Elsman storage relative to its five-year average and temporarily took one treatment plant offline. Drought, weather variability, supply costs, and water availability could affect expenses and operations.
- COVID-19 and collections: The company reported higher uncollectible receivables and prevention costs. Recovery of related balances depends on regulators; recovery probability had not yet been established for CTWS. Customer disconnection protections were extended in California through June 30, 2021.
- Financing and other risks: Variable-rate borrowings expose the company to interest-rate risk. The filing identifies regulatory outcomes, financing access, climate and catastrophic events, infrastructure damage, demand, and other factors as risks. SJW Group reported compliance with applicable debt covenants. Routine litigation was not expected to have a material effect, and the filing reported no material change to previously disclosed risk factors.
- Subsequent events: On April 23, 2021, SJWC and SJWTX replaced their $140 million and $5 million credit facilities, respectively, with new facilities maturing December 31, 2023. The board declared a $0.34-per-share dividend payable June 1, 2021.
Important facts for investors to verify
- Confirm the issuer: this filing is for SJW Group (ticker SJW), not H2O America.
- Track regulatory decisions and the timing and amount of any approved rate increases, including the California, Connecticut, and Maine proceedings.
- Monitor California drought conditions, water-source mix, and the potential effect of higher-cost groundwater or purchased water on margins.
- Assess execution and regulatory recovery of the planned capital program, and the resulting need for debt or equity financing.
- Separate recurring operating performance from the unusually favorable tax benefit and working-capital-driven cash-flow improvement in Q1 2021.
- Review COVID-related receivables and regulatory-account balances, since collection and recovery remain subject to customer payments and regulatory approval.