SJW Group Form 10-Q Summary
Filing identity: The supplied filing is for SJW Group, not H2O America as stated in the request metadata. It reports the quarter and six months ended June 30, 2018; dollar amounts below are in millions unless noted.
Business context and reporting period
SJW Group is a regulated water utility holding company, principally serving customers in the San Jose, California area, with additional regulated operations in Texas and a real-estate business. Water sales are seasonal, and interim results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $99.1 | $102.1 | $174.1 | $171.1 |
| Operating income | $22.8 | $31.8 | $30.1 | $43.5 |
| Operating margin | 23.0% | 31.2% | 17.3% | 25.4% |
| Net income attributable to SJW Group | $12.9 | $18.7 | $14.2 | $22.4 |
| Diluted EPS | $0.62 | $0.90 | $0.68 | $1.08 |
Q2 revenue fell 2.9%, while first-half revenue rose 1.8%. First-half operating cash flow was $45.4 versus $57.0 a year earlier. Investing used $67.4, including $62.1 of company-funded utility-plant additions; financing provided $23.1, principally reflecting $34.0 of net line-of-credit borrowings. Cash was $8.9 at June 30.
At June 30, long-term debt was $431.3 and line-of-credit borrowings were $59.0, compared with $431.1 and $25.0, respectively, at year-end 2017. The company reported $86.0 of unused credit capacity under aggregate $145.0 bank lines and compliance with debt covenants. Stockholders’ equity was $465.3. The quarterly dividend was $0.28 per share, up from $0.22 a year earlier.
Material changes versus the prior comparable period
- Net income declined 31% in Q2 and 37% in the first half. Operating income also fell substantially, reflecting higher operating expenses and lower recognized revenue from certain regulatory accounts.
- Q2 revenue was pressured by lower Water Conservation Memorandum Account revenue and Tax Act-related customer benefits, partly offset by higher rates, usage, and customer count. First-half revenue growth reflected higher usage and rates, partly offset by these regulatory items.
- First-half operating expenses increased $16.4, including $6.6 of merger-related costs, $5.0 of higher water-production expense, and $3.1 of additional depreciation and amortization.
- First-half 2017 included a $6.9 gain on real-estate sales that did not recur. The 2018 federal tax-rate reduction lowered income tax expense; regulators directed that relevant benefits be passed through to customers.
Outlook, risks, and unusual items
- Management expected the proposed all-stock merger with Connecticut Water Service to close in Q4 2018, subject to shareholder, regulatory, and other conditions. The exchange ratio was 1.1375 SJW shares per CTWS share. The filing emphasizes that completion is not assured and identifies regulatory, shareholder, competing-proposal, litigation, and execution risks. SJW could owe CTWS a $42.5 million termination fee in specified circumstances.
- Cal Water had made an unsolicited $68.25-per-share cash tender offer for SJW; SJW’s board recommended that shareholders reject it and supported the CTWS merger. The filing also describes two CTWS shareholder lawsuits; SJW said it would defend them, but could not estimate potential loss.
- For 2018, Water Utility Services budgeted approximately $120 million in company-funded capital expenditures; $62.1 million, or 52%, had been spent by June 30. Five-year projected capital expenditures were approximately $760.8 million, a significant portion subject to future regulatory approval.
- San Jose Water Company reported sufficient supply to meet customer demand through the rest of 2018, while noting that local surface-water availability affects costs. CLWSC entered Stage 1 drought restrictions in June. California conservation mandates and future regulatory implementation remain relevant uncertainties.
- San Jose Water Company’s pending general rate case requested revenue increases for 2019–2021; new rates, if approved, were expected to take effect January 1, 2019. Several 2018 rate adjustments and surcharges took effect July 1. The company stated the Tax Act rate benefits are expected to flow to customers, not increase after-tax income.
- Cash from operations is expected to be affected by further merger fees. The filing also notes variable-rate borrowing, pension-asset and equity-price exposure, and an ongoing Texas franchise-tax audit.
Key facts for investors to verify
- Confirm the intended issuer: this document identifies SJW Group, not H2O America.
- Track merger approvals, shareholder votes, competing proposals, litigation, closing timing, and any termination-fee exposure.
- Assess whether regulatory rate decisions and balancing-account recoveries offset water-cost inflation and Tax Act-related customer credits.
- Monitor operating cash flow, line-of-credit usage, capital spending, and funding needs alongside the planned utility-system investment.
- Review water-supply conditions, drought restrictions, and the timing and cost impact of purchased water and groundwater charges.