SJW Group Form 10-Q Summary
Entity note: The request identifies H2O America, but the supplied filing is SJW Group’s Form 10-Q. The figures and summary below are for SJW Group and its subsidiaries.
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2020. SJW Group provides regulated water utility services in California, Connecticut, Maine and Texas, alongside smaller non-tariffed and real estate businesses. Results include Connecticut Water Service (CTWS), acquired October 9, 2019; therefore, 2020-versus-2019 comparisons are affected by the expanded business scope. Water demand is seasonal, and interim results are not necessarily indicative of full-year performance.
Key financial metrics
Dollar amounts below are in millions except per-share data. Margins are calculated from reported figures.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $147.2 | $103.0 | $263.0 | $180.6 |
| Operating income | $36.1 | $22.0 | $51.5 | $34.4 |
| Operating margin | 24.5% | 21.3% | 19.6% | 19.0% |
| Net income attributable to SJW Group | $19.7 | $13.5 | $22.1 | $19.4 |
| Basic / diluted EPS | $0.69 / $0.69 | $0.48 / $0.47 | $0.78 / $0.77 | $0.68 / $0.68 |
| Dividends per share | $0.32 | $0.30 | $0.64 | $0.60 |
For the first six months, operating cash flow was $32.3 million, down from $49.8 million; investing cash outflow was $81.1 million, including $74.1 million of company-funded utility-plant additions. Financing provided $54.1 million. Cash and cash equivalents were $23.3 million at June 30, versus $12.9 million at year-end 2019; restricted cash was zero.
At June 30, total assets were $3.210 billion and stockholders’ equity was $895.1 million. Long-term debt, including its current portion, was $1.338 billion; line-of-credit borrowings were $146.7 million. The company reported $163.3 million of unused short-term credit capacity and compliance with applicable debt covenants. The filing reports fair-value long-term debt of $1.516 billion, compared with book value of $1.338 billion.
Material changes versus the prior comparable period
- Q2 revenue rose 43% and net income rose 46%; first-half revenue rose 46% and net income rose 14%. Management attributed growth mainly to the CTWS acquisition, higher SJWC customer usage and rates, and the addition of CTWS earnings.
- Higher water production costs reflected the acquired operations, reduced availability of SJWC surface water, increased customer usage, and higher purchased-water, groundwater and energy costs. First-half production expense increased $33.0 million year over year.
- Interest expense increased with acquisition-related borrowing and other debt issuance. Depreciation also increased as utility assets were placed in service.
- First-half operating cash flow declined despite higher earnings, mainly because of lower collections from balancing and memorandum accounts, increased receivables and unbilled revenue, a $5.0 million service-concession payment, and payments of previously accrued amounts.
Outlook, risks, contingencies and unusual items
- Capital program: 2020 Water Utility Services company-funded capital expenditures were budgeted at approximately $221.8 million; $74.1 million had been spent through June 30. The company expects approximately $1.2 billion of capital expenditures over five years, with a significant portion subject to future regulatory approval.
- COVID-19: Regulators suspended or restricted customer disconnections in several service areas, and the company waived certain fees and tracked pandemic-related costs and lost revenue for possible future recovery. Management said the pandemic had not materially adversely affected first-half results, but its ultimate effects and the timing or approval of recovery remain uncertain. Slower customer collections were already affecting cash flow.
- Water supply: SJWC reported low reservoir and surface-water conditions, increasing reliance on groundwater and higher-cost supply; management nevertheless expected available sources to meet demand through 2020. CLWSC began Stage 1 drought restrictions in July 2020 and also expected to meet demand with conservation measures.
- Regulatory matters: A CPUC customer-billing investigation concluded in February 2020 after approval of a settlement requiring approximately $2.1 million in customer credits and $5.0 million of utility-plant investment with no return or rate recovery. Other rate and cost-recovery requests remained pending. Recovery of pandemic costs and lost revenue is not assured.
- Debt and funding: The company amended or added credit facilities during the quarter, including a $50 million SJWC facility maturing November 11, 2020. Variable-rate borrowing costs, access to capital markets and refinancing are risks. The company stated it believed external funding would be available for ongoing investment needs.
- Other items: The CTWS acquisition added substantial goodwill; the preliminary purchase-price allocation remained subject to measurement-period adjustments. The filing identifies possible goodwill impairment among pandemic-related risks. A $35 million Connecticut Water note was issued at 3.51%, due in 2050. The board declared a $0.32-per-share quarterly dividend on July 29, payable September 1, 2020.
Important facts for investors to verify
- Confirm the intended company: the supplied filing is for SJW Group (ticker SJW), not an issuer identified as H2O America.
- Track whether receivables, unbilled revenue and customer payment patterns improve, and whether regulators authorize recovery of pandemic-related costs and lost revenue.
- Assess whether planned capital investment, regulatory approvals and financing capacity remain consistent with the company’s stated five-year program.
- Monitor drought conditions, water-supply mix and related production costs, particularly in California and Texas.
- Review pending regulatory proceedings and any changes to the preliminary CTWS acquisition accounting or goodwill assessment.