SJW Group — Q1 2020 Form 10-Q
Filing identity: The supplied filing is for SJW Group (NYSE: SJW), not H2O America. It reports the three months ended March 31, 2020, with the prior-year comparison to Q1 2019. Unless otherwise noted, amounts below are in millions of dollars.
Business context and reporting period
SJW Group operates regulated water utilities in California, Connecticut, Maine and Texas, alongside non-tariffed water services and real estate activities. The October 2019 acquisition of Connecticut Water Service (CTWS) materially changed the business mix: Q1 2020 includes the acquired operations, while Q1 2019 does not. Water sales are seasonal, and the company cautions that quarterly results are not indicative of full-year results.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date | Change |
|---|---|---|---|
| Revenue | $115.8 | $77.7 | +49% |
| Operating income | $15.4 | $12.4 | +24% |
| Operating margin | 13.3% | 16.0% | Down 2.7 percentage points |
| Net income | $2.4 | $5.9 | Down 59% |
| Diluted EPS | $0.08 | $0.21 | Down |
| Operating cash flow | $7.9 | $25.2 | Down $17.3 |
| Company-funded utility capital additions | $38.3 | $29.6 | Up |
Net margin was approximately 2.1%, compared with 7.6% a year earlier. Revenue growth reflected $27.4 million from SJWNE (the CTWS operations), higher customer usage and rate increases. Operating expenses rose $35.1 million, including increased water production costs, acquired operations, administration and depreciation. Management cited reduced use of lower-cost surface water, higher customer usage, and increased groundwater, purchased-water and energy costs. Interest expense more than doubled to $13.3 million, primarily reflecting acquisition-related and other new debt; lower interest income also contributed to the earnings decline.
Cash and cash equivalents were $28.3 million at March 31, 2020, versus $12.9 million at year-end 2019. Current assets were $128.8 million and current liabilities $238.4 million. Long-term debt, including its current portion, was $1.339 billion; line-of-credit borrowings were $131.4 million. The filing reported $103.6 million of unused short-term credit capacity. Total debt represented by those balance-sheet amounts was approximately $1.471 billion. Stockholders’ equity was $883.5 million. The quarterly dividend was $0.32 per share, versus $0.30 in Q1 2019; the board declared another $0.32 dividend for payment June 1, 2020.
Material changes, outlook and risks
- Acquisition and comparability: CTWS was acquired in October 2019, so year-over-year consolidated growth is not like-for-like. Acquisition-related debt increased financing costs; merger expenses fell to $0.4 million from $2.6 million.
- Cash use and investment: Operating cash flow fell to $7.9 million, partly due to lower collections from balancing and memorandum accounts, settlement of previously accrued amounts, and a $5.0 million upfront Cupertino service-concession payment. The company used $42.5 million in investing activities. Its 2020 company-funded capital expenditure budget was approximately $225.8 million; planned five-year capital expenditures were approximately $1.2 billion, with a significant portion subject to regulatory approval.
- COVID-19: Utility disconnection moratoria and economic disruption may reduce customer payments and commercial water usage. The company is tracking costs and revenue impacts for potential regulatory recovery, but says recovery is not assured or necessarily timely. COVID-19 may also delay infrastructure work, disrupt operations and supply chains, affect access to capital, and prompt reassessment of acquisition-related goodwill. No quantified full-year pandemic impact or earnings guidance is provided.
- Water supply: Management said supplies should be sufficient to meet demand through the remainder of 2020. However, California reservoir storage was reported at 35% of capacity on April 1, 2020; limited surface-water availability matters because it is a lower-cost source. Weather, water availability and supply costs remain significant risks.
- Regulatory and contingencies: The CPUC investigation into the CTWS merger remained pending at quarter-end. A separate California billing-practices proceeding was concluded with an agreement requiring about $2.1 million in customer credits and $5.0 million of utility-plant investment without return or rate recovery. Other rate and surcharge matters were pending, including a Maine rate case and California advanced-metering cost-recovery application. The filing says routine litigation is not expected to have a material effect.
- Financing: Connecticut Water issued $35 million of 3.51% senior notes due 2050. Subsequent to quarter-end, SJWC increased an existing credit facility from $125 million to $140 million and entered a new $50 million facility maturing November 11, 2020. Management said it expected access to funding for ongoing investment, while noting that market conditions and interest rates could affect financing costs and availability.
Important facts for investors to verify
- Confirm the issuer: this is an SJW Group filing, although the request metadata names H2O America.
- Assess underlying performance excluding CTWS acquisition contributions and separate volume, rate, balancing-account and acquired-revenue effects.
- Track whether COVID-related bad debt, lower usage and operating costs are recovered through regulation, and the timing of any recovery.
- Review the funding plan for the substantial capital program, debt maturities, variable-rate borrowings, credit availability and compliance with debt covenants.
- Monitor California water supply conditions and the pending regulatory proceedings, including the CPUC merger investigation and capital-recovery requests.