SJW Group (10-Q) — Quarter ended September 30, 2017
Issuer identity: The supplied filing is for SJW Group, not H2O America. Confirm that this is the intended company before relying on the summary. Financial amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
SJW Group is a holding company whose principal business is regulated water utility service in California and Texas, with additional non-tariffed utility services and real estate activities. Water sales are seasonal and typically higher in warm, dry months; interim results may not represent full-year performance.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $124.6 | $112.3 | $295.7 | $260.4 |
| Operating income | $38.2 | $36.3 | $79.9 | $76.7 |
| Operating margin | 30.7% | 32.4% | 27.0% | 29.5% |
| Net income attributable to SJW Group | $19.5 | $19.0 | $41.9 | $39.1 |
| Diluted EPS | $0.94 | $0.92 | $2.03 | $1.90 |
| Net cash from operating activities | Not provided by quarter | $88.0 | $76.9 |
Revenue increased about 11% in Q3 and 14% for the nine-month period. Net income rose about 3% and 7%, respectively. Operating margins declined in both comparisons as operating costs grew faster than revenue. Nine-month results included a $6.9 pre-tax gain on real estate sales; the prior-year period included a $3.2 gain on the sale of California Water Service Group stock.
- Costs and cash generation: Nine-month operating expenses rose to $215.8 from $183.7, including higher water production costs, administration, and depreciation. Company-funded utility-plant additions used $103.4 of cash. Investing activities used $95.5; financing activities used $10.3.
- Debt and liquidity: At September 30, long-term debt was $431.0 and line-of-credit borrowings were $13.0. Cash was $7.6; unused short-term credit facilities totaled $132.0. Current assets were $87.1 versus current liabilities of $93.4. The company reported compliance with applicable debt covenants.
- Capital spending: 2017 Water Utility Services budgeted capital expenditures were approximately $136, of which about 76% had been spent by September 30. The company estimated approximately $663 of capital expenditures over five years, subject to regulatory approval.
- Dividends: Dividends paid in the first nine months totaled $13.4. The Board declared a $0.2175-per-share quarterly dividend payable December 1, 2017.
Material changes, outlook, risks, and unusual items
- Higher rates and customer usage drove revenue growth. Q3 water-utility revenue also reflected a $2.6 decrease in Water Conservation Memorandum Account revenue versus the prior year. Nine-month revenue included $2.6 from that account, while prior-year revenue included $8.8 of 2015 General Rate Case true-up revenue.
- Purchased-water prices increased about 9% and groundwater extraction charges about 10% effective July 1, 2017. Higher usage and reduced availability of lower-cost surface water also increased production costs. Unaccounted-for water was 8.7% of production, compared with 8.2% a year earlier.
- Management said water supplies were expected to be sufficient to meet demand through the remainder of 2017. At October 1, Santa Clara Valley Water District reservoirs were 46% full; the Montevina treatment-plant retrofit restricted use of local surface water, with completion anticipated in Q4 2017.
- Several CPUC matters remained pending: a requested 2018–2020 cost-of-capital increase that could add approximately $7.6 of annual revenue in 2018 if approved; review of a rejected sales-reconciliation filing; and a request to recover an $11.5 under-collected 2012 rate-case balance. A proposed customer surcredit was rejected amid a related complaint proceeding.
- SJW Group expected to complete the sale of Texas Water Alliance Limited to GBRA in Q4 2017 for $31.0, subject to GBRA financing and other closing conditions. SJW had received a $3.0 non-refundable deposit, creditable against the purchase price if the sale closes; a further $3.0 would be held back until 2021, subject to reductions.
- The CEO transition was announced: Eric Thornburg was appointed to become CEO effective November 6, 2017, succeeding W. Richard Roth. Management also cited ordinary business risks, including regulatory decisions, water-supply conditions, interest rates, pension asset values, and equity-price fluctuations. No material change to previously disclosed risk factors was reported; no material litigation was identified.
- No earnings guidance was provided. Management cautioned that forward-looking statements are subject to risks and actual results may differ materially.
Important facts for investors to verify
- Confirm the issuer: the filing identifies SJW Group, while the request names H2O America.
- Track CPUC decisions on the cost-of-capital request, sales reconciliation, and proposed recovery of the $11.5 rate-case under-collection.
- Verify whether the GBRA transaction closed, its final proceeds, and the conditions on the deferred holdback.
- Assess whether higher purchased-water and groundwater costs, conservation-related sales changes, and surface-water availability affect margins and cash flows.
- Monitor capital spending, debt and credit-facility use, and the timing and regulatory recovery of utility investments.