Filing summary
Entity note: The supplied filing is SJW Group’s Form 10-Q, ticker SJW, not a filing by H2O America. The financial statements cover the quarter and nine months ended September 30, 2019. The October 9, 2019 Connecticut Water Service merger closed after quarter-end and is not included in the period’s consolidated results.
Financial results
Amounts below are in millions of dollars, except per-share data. Comparisons are with the same 2018 period.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $114.0 | $124.9 | $294.6 | $299.0 |
| Operating income | $17.1 | $25.8 | $51.5 | $56.0 |
| Operating margin | 15.0% | 20.7% | 17.5% | 18.7% |
| SJW Group net income | $9.5 | $15.8 | $28.9 | $29.9 |
| Diluted EPS | $0.33 | $0.76 | $1.01 | $1.45 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $91.3 | $73.7 |
Q3 revenue declined about 9%, operating income 34%, and net income 40%. For the nine months, revenue declined about 1%, operating income 8%, and net income 4%. Reported revenue includes regulatory balancing and memorandum account adjustments; it is not solely customer billings. Dividends were $0.30 per share in Q3, versus $0.28 a year earlier.
Cash, debt and capital investment
- At September 30, cash and cash equivalents were $424.7 million, including a $412.0 million money market fund. Current assets were $507.8 million and current liabilities were $144.3 million.
- Long-term debt, less current portion, was $511.1 million; line-of-credit borrowings were $62.0 million. SJW reported $83.0 million of unused short-term credit capacity and compliance with debt covenants.
- Nine-month capital spending included $101.1 million of company-funded utility plant additions and $10.0 million funded by contributions in aid of construction. Operating cash flow was below investing cash use of $114.8 million.
- In March, San Jose Water issued $80 million of 4.29% senior notes due 2049. After quarter-end, SJW Group issued $510 million of senior notes at rates of 3.05%–3.53% and used proceeds, prior equity-offering proceeds and other funds to finance the merger.
Drivers, outlook and material developments
- Water-conservation regulatory reserves: Management attributed much of the Q3 revenue and earnings decline to fully reserving the 2018 and 2019 Water Conservation Memorandum Account balances after conflicting proposed CPUC decisions called the probability of recovery into question. These reserves drove a $13.7 million year-over-year negative revenue impact in Q3; the nine-month impact was $17.2 million.
- Costs and offsets: Q3 operating expenses declined overall, mainly because merger-related costs fell $6.7 million year over year. That benefit was partly offset by higher administrative costs, depreciation, and water-production costs. Greater surface-water use reduced production costs, while purchased-water and groundwater charges increased effective July 1.
- Merger: SJW completed its $838.5 million cash acquisition of Connecticut Water Service on October 9. The purchase-price allocation was incomplete at filing. Management cited integration costs, possible undisclosed liabilities, regulatory conditions and restrictions from ring-fencing commitments as risks. The CPUC’s merger investigation remained a risk despite closing.
- Near-term items: Management expected approximately $12.2 million of additional merger-related expenses affecting fourth-quarter operating cash flow. It also estimated a $5.7 million fourth-quarter write-off of a deferred tax asset related to merger transaction costs; the final amount could change.
- Water and capital outlook: Management believed available sources would meet customer demand through the remainder of 2019. The 2019 company-funded capital budget was approximately $131 million, with $101.1 million spent by September 30. The five-year utility capital plan was approximately $699.2 million, a significant portion subject to future regulatory approval.
- Regulatory and legal contingencies: A proposed billing-practice settlement required approximately $2.1 million in customer credits and a $5.0 million investment in utility plant without return or rate recovery; CPUC approval was pending. The company had already recorded the customer-credit expense in Q2. Regulatory decisions on rate recovery, conservation, and the merger could affect results.
Most important facts to verify
- Confirm the entity: the filing is SJW Group, not H2O America.
- Track CPUC decisions on recovery of the 2018 and 2019 conservation-account balances and approval of the billing-practice settlement.
- Review post-merger debt, purchase accounting, integration costs and the estimated tax-asset write-off as they are reported in subsequent filings.
- Compare actual capital spending, water supply and customer demand with management’s plans, and assess the effect of conservation and rate regulation on revenue.