SJW Group Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2016; this is an annual report, not a standalone fourth-quarter filing. SJW Group, formerly SJW Corp., is a regulated water utility holding company with operations in California and Texas and a smaller real estate business. Its California utility serves about 229,000 connections; its Texas utility serves about 13,000.
Financial results and liquidity
Amounts below are in millions of dollars unless stated otherwise.
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $339.7 | $305.1 | +11.4% |
| Operating income | $93.1 | $80.0 | +16.5% |
| Operating margin | 27.4% | 26.2% | +1.2 percentage points |
| Net income | $52.8 | $37.9 | +39.5% |
| Diluted EPS | $2.57 | $1.85 | +38.9% |
| Operating cash flow | $114.1 | $97.3 | +$16.8 |
| Company-funded utility capital expenditures | $129.1 | $96.0 | +$33.1 |
- Fourth-quarter revenue was $79.3 million versus $87.6 million in fourth-quarter 2015; net income was $13.7 million versus $16.2 million.
- Net cash used in investing activities was $122.1 million, principally reflecting utility investment. Net cash provided by financing activities was $28.2 million.
- At year-end, cash and cash equivalents were $6.3 million, with another $19.0 million of restricted cash. Current assets were $99.6 million and current liabilities $63.6 million.
- Long-term debt, including current portion, was $437.7 million; lines of credit outstanding were $14.2 million. Management reported consolidated debt at 52% of capitalization and $130.8 million of unused credit lines. The company reported compliance with debt covenants.
- Annual dividends were $0.81 per share, up from $0.78; dividends paid totaled $16.6 million, or 31% of 2016 net income.
Material changes versus prior period
- Revenue rose $34.6 million, chiefly from $28.6 million of additional revenue associated with the California general rate case, plus $6.8 million net general-rate-case true-up revenue. These gains were partly offset by lower conservation-account revenue and slightly lower usage.
- Operating expenses increased $21.5 million. Production costs rose $13.7 million, as higher purchased-water and groundwater charges outweighed savings from increased surface-water use and lower customer usage. Depreciation and maintenance costs also increased.
- Net income benefited from gains on asset sales: a $10.4 million real-estate gain, primarily from the Arizona property, and a $3.2 million gain on California Water Service Group stock. These items make the year-over-year earnings increase less indicative of recurring utility performance.
- California water production was 35.8 billion gallons, down from 36.5 billion in 2015. Purchased-water and groundwater costs rose, including July 2016 unit-price increases of approximately 18% and 20%, respectively.
Outlook, commentary, risks and unusual items
- Management expected water supplies to be adequate for 2017 in both California and Texas. California reservoir and groundwater conditions had improved; however, conservation restrictions remained in effect after drought allocations and surcharges were suspended on February 1, 2017.
- Management projected approximately $136.2 million of 2017 capital expenditures and $663.0 million over five years, subject in part to regulatory approval. The 2017 budget included $20.9 million for the Montevina treatment plant upgrade and about $36.2 million for pipe and main replacement.
- The CPUC approved a 3.8% California escalation-year revenue increase effective January 1, 2017. A requested sales reconciliation mechanism and a further $5.3 million plant-related rate-base increase were pending at the filing date.
- The proposed sale of Texas Water Alliance to the Guadalupe-Blanco River Authority for $31.0 million remained subject to closing conditions, including buyer financing; $3.0 million would be held back for four years after closing, subject to possible reductions.
- Key risks include rate-setting and recovery delays, drought and conservation effects on demand, purchased-water and energy costs, significant infrastructure needs and financing requirements, water quality and environmental compliance, cyber and operational disruptions, pension funding, and natural disasters. CLWSC also has long-term take-or-pay water contracts.
- The Arizona warehouse transferred under eminent domain in 2016. The filing reported no pending litigation expected to have a material effect. The auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- How much of 2016 earnings growth came from recurring authorized rates versus asset-sale gains and regulatory true-ups.
- Whether pending California rate and sales-reconciliation requests were approved, and how conservation affects actual consumption and recoveries.
- Whether the TWA sale closed, its final proceeds and any impact of the holdback.
- Capital-spending delivery, future rate-base recovery, and the effect of rising water-supply costs on margins and cash needs.
- Debt, liquidity and pension funding as the multi-year infrastructure program proceeds.