SJW Group — Q1 2019 Form 10-Q
Filing identity: The supplied filing is for SJW Group, not H2O America. It covers the three months ended March 31, 2019; financial statements are unaudited. Amounts below are in millions except per-share data.
Business context and reporting period
SJW Group provides regulated water utility services in California and Texas and operates a smaller real estate business. Water sales are seasonal, and management cautions that first-quarter results are not indicative of full-year results. The company reported approximately 231,000 San Jose-area water connections and 16,600 Texas connections.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $77.682 | $75.042 | +3.5% |
| Operating income | $12.408 | $7.331 | +69.2% |
| Net income | $5.873 | $1.285 | +$4.588 |
| Diluted EPS | $0.21 | $0.06 | +$0.15 |
| Operating margin | 16.0% | 9.8% | +6.2 points |
| Net cash from operations | $25.193 | $22.582 | +$2.611 |
| Net cash used in investing | $34.373 | $31.563 | -$2.810 |
| Dividends per share | $0.30 | $0.28 | +$0.02 |
Cash and cash equivalents totaled $419.663 at March 31, including a $412.000 money-market fund. Long-term debt was $510.903 and line-of-credit borrowings were $32.000, for reported debt of approximately $542.903; unused credit lines totaled $113.000. Stockholders’ equity was $888.293. The company issued $80.000 of 4.29% senior notes due in 2049 during the quarter.
Material changes and management commentary
Management attributed the earnings improvement to higher rates and net recognition of balancing and memorandum accounts, lower production costs from greater surface-water use, $1.832 of interest income on invested equity-offering proceeds, and lower merger-related costs. Water Utility Services revenue increased $2.615; customer consumption changes reduced revenue by $3.853, partly offset by rate increases of $3.117, customer growth of $0.800, and regulatory-account activity. Operating expenses declined $2.437 overall: production expenses fell $3.644, while depreciation and amortization rose $1.562. Merger-related expenses were $2.601, down from $3.806.
The effective tax rate was 26% versus negative 82% in the prior-year quarter; the 2018 rate reflected $0.747 of excess stock-compensation tax benefits, compared with $0.052 in 2019. Company-funded utility-plant additions were $29.575. Management budgeted approximately $131.000 of 2019 Water Utility Services capital expenditures, excluding customer-funded amounts, and projected approximately $699.228 over five years, with a significant portion subject to regulatory approval.
Outlook, risks, contingencies, and unusual items
- Water supply and regulation: Management said supply sources should be sufficient for customer demand through the remainder of 2019. Surface water is less costly than groundwater or purchased water. Permanent conservation restrictions and California water-use mandates remain relevant; implementation details for state legislation were still developing.
- Rates and customer refunds: California regulators approved a 2019 revenue-requirement increase of $16.378, or 4.55%, and recovery surcharges for $27.045 of under-collections. A $9.020 WCMA recovery request was pending. The company refunded $2.020 to customers for the agreed billing-practice settlement period. A separate CPUC investigation could result in additional refunds or penalties for alleged earlier overbilling or double billing; the company could not reasonably estimate any additional loss.
- Proposed CTWS merger: The proposed $70-per-share cash acquisition remained subject to regulatory approvals. After PURA’s proposed denial and withdrawal of the earlier application, SJW Group and CTWS filed a new PURA application on April 3, 2019. Maine approval was also pending, and the CPUC had suspended its investigation pending PURA’s decision. The filing states completion is not assured and failure could adversely affect results, operations, and share price.
- Merger financing and exposure: SJW Group reported approximately $412.0 of net proceeds from its December 2018 equity offering, held temporarily in a money-market fund, and a bridge-financing commitment reduced to $563.0. The merger could require substantial additional debt, increase borrowing costs, and affect credit ratings. Termination provisions include potential fees of up to $42.5 payable by SJW Group and, in certain circumstances, up to $5.0 in expense reimbursement.
- Other risks and unusual items: Merger-related shareholder litigation was subject to settlement arrangements, with a mootness-fee demand reported; SJW Group considered its own exposure remote. The company also cited pension funding, variable-rate borrowing, regulatory decisions, water-supply costs, and the uncertainty of merger-related integration and expenses as risks. No formal earnings guidance was provided in the supplied filing text.
Most important facts for investors to verify
- Confirm the registrant: this filing is SJW Group, despite the H2O America request metadata.
- Track PURA and Maine regulatory decisions, CPUC merger proceedings, and whether the CTWS transaction closes or is terminated.
- Monitor the CPUC billing investigation for potential refunds or penalties beyond the $2.020 already refunded.
- Assess the use and liquidity of the $412.000 money-market balance alongside merger financing needs, debt levels, and credit-line availability.
- Compare actual water consumption, supply mix, capital spending, and regulatory-account recoveries with management’s statements and projections; first-quarter performance is seasonal.