Business context and reporting period
SJW Group (NYSE: SJW) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The filing covers regulated water utilities in California, Connecticut, Maine, and Texas, plus real estate and related services. The metadata identifies H2O America, but the filing itself is for SJW Group; verify the issuer before relying on this summary.
Comparisons with 2019 are affected by SJW Group’s October 9, 2019 acquisition of Connecticut Water Service (CTWS); the 2020 results include CTWS, while the comparable 2019 periods generally do not.
Financial performance and position
Amounts below are in millions of dollars except per-share data. Quarterly and year-to-date figures compare periods ended September 30.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $165.9 | $114.0 | $428.8 | $294.6 |
| Operating income | $41.9 | $17.1 | $93.4 | $51.5 |
| Net income attributable to SJW Group | $26.1 | $9.5 | $48.2 | $28.9 |
| Diluted EPS | $0.91 | $0.33 | $1.68 | $1.01 |
| Operating margin | 25.2% | 15.0% | 21.8% | 17.5% |
Revenue increased 45% in Q3 and 46% for the nine months; net income increased approximately 175% and 67%, respectively. Management attributed the earnings gains primarily to CTWS, higher SJWC usage and rate increases, partly offset by production costs, higher interest expense, and balancing-account effects. Q3 included a $1.05 million gain on sale of real estate. The effective tax rate was 15% for Q3 and 16% year to date, versus 21% and 23% in 2019, primarily reflecting flow-through tax benefits.
For the first nine months, operating cash flow was $70.6 million, down from $91.3 million. Investing cash outflow was $141.2 million, including $130.4 million of company-funded utility-plant additions. Financing provided $72.9 million. Cash and cash equivalents were $20.2 million at September 30; the company also reported $184.2 million of unused short-term credit capacity. Long-term debt, including its current portion, was approximately $1.380 billion; line-of-credit borrowings were $125.8 million. Stockholders’ equity was $913.1 million.
The declared quarterly dividend was $0.32 per share, equal to the Q3 dividend and up from $0.30 in Q3 2019. The board declared another $0.32-per-share dividend on October 28, payable December 1, 2020.
Material changes and management outlook
- CTWS contributed substantially to year-over-year revenue and expense growth following the merger. SJW Group reported nine-month revenue from CTWS-related operations as a major contributor to the increase.
- Operating costs rose: nine-month total operating expense increased 38%. Management cited the acquired operations, reduced availability of lower-cost surface water at SJWC, increased usage, and higher depreciation; merger expenses declined after the acquisition closed.
- Interest expense increased with acquisition-related and other debt. During 2020, SJW Group issued $50 million of 2.47% senior notes due 2030; Connecticut Water issued $35 million of 3.51% senior notes due 2050.
- Management expected 2020 company-funded capital expenditures of approximately $195–$200 million, below the original $221.8 million budget after project delays associated with COVID-19. It estimated approximately $1.2 billion of capital expenditures over five years, with a significant portion subject to regulatory approval.
- Management said water supplies were expected to meet demand through the remainder of 2020, while noting low local reservoir and surface-water levels and reduced Valley Water allocations. SJWC’s Saratoga treatment plant remained offline due to limited creek runoff. CLWSC exited Stage 1 drought restrictions on October 9.
Risks, contingencies, and unusual items
- COVID-19 protections, including restrictions on customer disconnections, could weaken collections and increase bad debt; management tracks certain costs and lost revenues for potential regulatory recovery, but recovery is not assured. The company reported no material adverse financial effect from COVID-19 through September 30.
- Water sales are seasonal and depend on weather, customer demand, water availability, and the mix and cost of purchased, groundwater, and surface-water supplies. Management cautioned that interim results are not indicative of full-year results.
- Most utility revenue depends on rates and cost-recovery decisions by state regulators. Delays, disallowances, or changes to authorized rates or capital recovery could affect earnings and cash flows.
- Debt, variable-rate credit facilities, refinancing access, and the transition away from LIBOR create financing and interest-rate risks. SJW Group and its subsidiaries reported compliance with applicable debt and credit covenants at September 30.
- A CPUC customer-billing investigation was concluded after approval of a settlement requiring approximately $2.1 million in customer credits and $5 million of utility-plant investment without an allowed return or rate recovery. The filing says no pending legal proceedings are expected to have a material effect.
- Other notable items include a $1.05 million Q3 real-estate gain and a $1.22 million regulatory asset recognized after approval to recover a memorandum-account balance. A prior reserve for 2018 and 2019 Water Conservation Memorandum Account balances had been recorded after recovery was judged not probable.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is SJW Group, not H2O America.
- Assess how much of reported growth reflects the CTWS acquisition versus underlying usage, rates, and other factors; reported comparisons are not on a pro forma basis.
- Review cash conversion, receivables, and unbilled revenue: operating cash flow fell, and management cited slower collections, higher receivables, and reduced collections from balancing accounts.
- Check actual capital spending, project execution, and regulatory approval or recovery of planned investments and COVID-19-related costs.
- Monitor drought conditions, water-supply costs, customer payment trends, regulatory rate decisions, debt maturities, and the LIBOR transition.