Business context and reporting period
This is SJW Group’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The filing registrant is SJW Group; it does not identify H2O America as the registrant. SJW Group primarily provides regulated water utility services in California and Texas, with a smaller real estate business. Unless otherwise stated, dollar amounts below are in thousands.
Water sales are seasonal and generally higher during warm, dry months; interim results therefore may not indicate full-year performance.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $102,073 | $86,944 | $171,118 | $148,056 |
| Operating income | $30,787 | $29,800 | $41,620 | $40,381 |
| Net income attributable to SJW Group | $18,688 | $16,775 | $22,359 | $20,153 |
| Diluted EPS | $0.90 | $0.82 | $1.08 | $0.98 |
| Dividends per share | $0.22 | $0.20 | $0.44 | $0.41 |
Q2 revenue rose about 17% and SJW-attributable net income about 11% year over year; six-month revenue rose about 16% and net income about 11%. Operating margins were approximately 30.2% in Q2 versus 34.3% a year earlier, and 24.3% for the six months versus 27.3%. Higher water production costs substantially outpaced revenue growth.
For the six months, operating cash flow was $56,991, compared with $55,371 in 2016. Company-funded utility-plant additions were $62,037, and total investing cash outflow was $52,986, partly offset by property-sale proceeds and a $3,000 deposit related to the pending Texas Water Alliance sale. Cash, cash equivalents and restricted cash ended at $9,228, down $16,122 from the start of the period. Six-month dividends paid were $8,916.
At June 30, cash and cash equivalents were $9,220; current assets were $72,892 and current liabilities $70,396. Long-term debt, less current portion, was $430,926; there were no line-of-credit borrowings at quarter-end. The company reported $145,000 of unused short-term credit lines and compliance with applicable debt covenants. SJW Group’s total stockholders’ equity was $436,110.
Material changes versus the prior comparable period
- Rate increases, higher consumption, and revenue recognized through water conservation memorandum accounts (WCMA) supported water utility revenue. These benefits were partly offset by $8,767 less general-rate-case true-up revenue than in 2016.
- Water production expenses increased $10,789 in Q2 and $16,307 for the six months. Drivers included higher purchased-water and groundwater extraction costs, higher energy prices, a less favorable mix with reduced surface water, and increased usage. Purchased-water and groundwater charges had risen in July 2016; further respective increases of 9% and 10% took effect July 1, 2017.
- Operating costs also increased from wages, regulatory fees and contracted work, depreciation on a larger utility-plant base, and taxes, including Delaware franchise tax following the company’s 2016 reincorporation.
- Q2 and six-month results included a $6,903 pretax gain on California real estate sales. The comparable 2016 periods included a $3,197 gain on the sale of California Water Service Group stock. The 2017 property gain included $1,896 attributable to a noncontrolling interest.
- Interest on long-term debt increased, including following the issuance of California Pollution Control Financing Authority revenue bonds in December 2016.
Outlook, management commentary, risks and unusual items
- Water supply and conservation: Management expected available sources to meet demand through the remainder of 2017. As of July 1, Santa Clara Valley Water District reservoirs were about 61% full, or 97% of the 20-year average. California drought emergency status had been lifted for most counties, but local conservation calls and water-use restrictions remained. Local surface-water availability was constrained by the Montevina treatment plant retrofit, expected to continue through Q3 2017.
- Rates and regulatory matters: A CPUC cost-of-capital application for 2018–2020, if approved, could increase annual revenues by approximately $7,550, or 2.1%, in 2018. The CPUC approved a $12,407 revenue increase to offset higher water-supply costs, effective in connection with supplier cost changes from July 1, 2017. Requests for a $1,794 customer surcredit and review of a rejected sales-reconciliation filing remained pending.
- Capital needs: The 2017 Water Utility Services capital-expenditure budget was approximately $136,000, with 46% spent by June 30. Management estimated approximately $663,000 of capital expenditures over five years, subject to regulatory approvals, including $20,900 for the Montevina plant. Funding is expected from internal cash generation, debt, equity or asset sales.
- Pending Texas Water Alliance transaction: SJW Group agreed to sell its interest in Texas Water Alliance to the Guadalupe-Blanco River Authority for $31,000, subject to financing and other closing conditions. SJW received a $3,000 nonrefundable deposit in June; a further $3,000 holdback is payable in 2021 if the transaction closes, subject to possible reductions. The filing cautions that closing is not assured.
- Other risks and items: Earnings and cash generation are exposed to regulatory timing, water costs and availability, conservation-related consumption changes, interest rates, pension-asset values, and execution of substantial infrastructure investment. Management reported no material change to previously disclosed risk factors and no litigation expected to have a material effect. The filing does not provide formal earnings guidance.
- The board declared a regular quarterly dividend of $0.2175 per share on July 26, 2017, payable September 1, 2017.
Important facts for investors to verify
- Confirm the identity and ticker of the intended company: this filing is for SJW Group, not a registrant named H2O America.
- Assess whether rate recovery and WCMA revenues will offset continuing supplier-cost increases, conservation effects, and reduced surface-water availability.
- Track CPUC decisions on the cost-of-capital application, sales-reconciliation review, and pending customer surcredit.
- Verify the timing and conditions of the Texas Water Alliance sale and any eventual receipt of the holdback.
- Compare planned capital spending and financing needs with operating cash flow, debt levels, and available credit.
- Separate recurring utility performance from property-sale gains and other regulatory true-ups when assessing earnings trends.