SJW Group — Q1 2017 Form 10-Q Summary
Entity note: The request identifies H2O America, but the supplied filing is for SJW Group. This summary covers SJW Group and its subsidiaries.
Business context and reporting period
The unaudited quarter ended March 31, 2017. SJW Group primarily provides regulated water utility services in California and Texas, with a smaller real estate business. Water sales are seasonal, so first-quarter results are not necessarily indicative of full-year performance. Unless otherwise noted, amounts below are in thousands of dollars.
Financial results and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $69,045 | $61,112 | +13.0% |
| Operating income | $10,833 | $10,581 | +2.4% |
| Operating margin | 15.7% | 17.3% | Down 1.6 percentage points |
| Income before taxes | $5,239 | $5,500 | -4.7% |
| Net income | $3,671 | $3,378 | +8.7% |
| Diluted EPS | $0.18 | $0.16 | Up $0.02 |
| Cash from operations | $28,242 | $32,573 | Down $4,331 |
| Company-funded utility plant additions | $27,745 | $31,560 | Down $3,815 |
Revenue growth reflected rate increases, including California rates effective January 1 and a Texas increase, plus a $1,371 recognition relating to a revision in the 2016 Water Conservation Memorandum Account (WCMA). These gains were partly offset by lower consumption and reduced real estate revenue. Purchased-water and groundwater extraction charges rose, and total operating expense increased 15.2%, faster than revenue.
At March 31, cash and cash equivalents were $7,092, restricted cash was $8, and current assets and liabilities were $73,736 and $50,780, respectively (a current ratio of approximately 1.45). The company had no line-of-credit borrowings at quarter-end and reported $145,000 of unused bank lines. Long-term debt, including its current portion, was $433,515 by carrying value; its disclosed fair value was $506,455. Stockholders’ equity was $421,400. Cash, cash equivalents and restricted cash declined $18,250 during the quarter.
Quarterly dividends were $0.22 per share in the income statement. On April 26, the board declared a $0.2175-per-share dividend, payable June 1 to holders of record May 8.
Material changes versus the prior comparable period
- Water Utility Services revenue increased, primarily from rate increases ($8,619) and the $1,371 WCMA customer-classification revision; lower consumption reduced revenue by $1,589.
- Water production expenses rose $5,518. The filing attributes the increase to higher purchased-water, groundwater and energy costs, including SCVWD unit-price increases effective July 2016, and a less favorable supply mix with less surface water.
- Interest on long-term debt increased, principally following a private activity bond issuance in December 2016. Income tax expense fell $554, and the effective tax rate was 30%, compared with 39%, partly because of a $500 share-based compensation tax benefit under newly adopted accounting guidance.
- Operating cash flow decreased $4,331, with lower net tax collections a key factor. Financing cash flow shifted from a $5,366 source in Q1 2016 to a $15,541 use in Q1 2017, including repayment of the $14,200 line-of-credit balance outstanding at year-end 2016.
Outlook, commentary, risks and unusual items
- Capital program: 2017 Water Utility Services capital expenditures, excluding customer-funded amounts, are budgeted at approximately $136,000; about $27,800, or 20%, had been spent by quarter-end. Planned five-year spending is approximately $663,000, subject to regulatory approvals, including $20,900 for the Montevina Water Treatment Plant upgrade.
- Water supply and drought: Management believed supply would be sufficient through the remainder of 2017. SCVWD reservoirs were approximately 85% full on April 1, 2017, and reported storage above the 20-year average. California’s drought emergency was lifted in most counties in April, but SCVWD restrictions remained. SJW suspended its allocation program and drought surcharges effective February 1; water-use restrictions continued. The Montevina plant retrofit was expected to continue through Q3 2017, restricting access to local surface water during construction.
- Regulatory matters: California’s 2017 escalation-year revenue increase of $13,205 (3.8%) took effect January 1; a $5,339 (1.5%) plant-addition rate increase took effect March 20. SJW requested a sales reconciliation mechanism, with a decision expected in Q2 2017. A cost-of-capital application filed April 3, if approved, could increase annual revenue by approximately $7,550 (about 2.1%) in 2018. These are regulatory requests or prospective effects, not assured outcomes.
- Subsequent real estate sales: On April 6, a partnership in which SJW Land Company held a 70% limited interest sold a property for $11,000; SJW also sold undeveloped San Jose land for $1,350. The company expected to record second-quarter gains, net of tax and expenses, of approximately $6,200 and $586, respectively. The first sale includes a $750 holdback for creek-bank remediation.
- Other contingencies and risks: The proposed sale of Texas Water Alliance Limited to GBRA for $31,000 remained subject to closing conditions, including GBRA financing; $3,000 would be held back for four years after closing, subject to possible reductions. SJW reported an ongoing California Franchise Tax Board examination of refund claims for 2008–2012. Management reported no pending litigation expected to have a material effect and no material changes to previously disclosed risk factors.
- Accounting and controls: Adoption of ASU 2016-09 produced the $500 tax benefit and reclassified employee taxes paid on withheld shares as financing cash flow; management said the diluted EPS effect was immaterial. Management reported disclosure controls were effective and no material first-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is SJW Group, not H2O America.
- Track whether the CPUC approves the sales reconciliation and cost-of-capital requests, and how rate actions affect realized revenue.
- Assess water supply, conservation restrictions, the drought-surcharge suspension, and the cost and timing impacts of the Montevina retrofit.
- Compare the $136,000 2017 capital budget and longer-term plan with actual spending, regulatory recovery, and financing needs.
- Verify completion and proceeds from the real estate sales, including the remediation holdback, and the status of the proposed Texas Water Alliance sale.
- Monitor operating cash generation, rising production costs, debt and interest costs, and the company’s continued compliance with debt covenants.