SJW Group 2019 Form 10-K Summary
Entity and period: The supplied filing is SJW Group’s Form 10-K for the fiscal year ended December 31, 2019, not a filing identified as H2O America. The 2019 results include Connecticut Water Service (CTWS) only from its October 9, 2019 acquisition date, limiting comparability with 2018.
Business context and financial performance
SJW Group operates regulated water utilities in California, Connecticut, Maine and Texas, alongside smaller real estate and water-related service businesses. The CTWS acquisition expanded the customer base to approximately 386,600 connections at year-end.
| Metric | 2019 | 2018 |
|---|---|---|
| Operating revenue | $420.5 million | $397.7 million |
| Operating income | $57.5 million | $73.4 million |
| Net income attributable to SJW Group | $23.4 million | $38.8 million |
| Diluted earnings per share | $0.82 | $1.82 |
| Cash flow from operations | $130.0 million | $91.3 million |
| Company-funded capital expenditures | $164.3 million | $136.0 million |
| Long-term debt, less current portion | $1,283.6 million | $431.4 million |
Operating margin was approximately 13.7% versus 18.5% in 2018; net margin was approximately 5.6% versus 9.8%. The filing does not present these margins as reported metrics; percentages are calculated from the stated figures. Fourth-quarter 2019 revenue was $125.8 million and SJW Group reported a $5.5 million net loss, compared with $98.7 million revenue and $8.8 million net income in fourth-quarter 2018.
Year-end cash and cash equivalents were $12.9 million, with a further $5.0 million restricted for water-plant construction. Lines of credit totaled $255.0 million, of which $117.2 million was drawn and $137.8 million remained available. Total long-term debt before unamortized items and current maturities was $1,292.6 million; lines of credit were additional borrowings. SJW Group reported compliance with debt covenants. Dividends paid were $34.1 million, or 146% of 2019 net income.
Material changes and unusual items
- Revenue rose 5.7%, primarily reflecting $21.7 million from acquired CTWS operations and $13.9 million from authorized rate increases. These contributions were partly offset by lower revenue from balancing and memorandum accounts, including the water-conservation account write-off.
- Net income fell 39.6%. Management attributed the decline mainly to merger and integration costs, higher production expenses and depreciation, partly offset by higher revenue and greater use of lower-cost surface water.
- The CPUC denied recovery of SJWC’s 2018 water-conservation memorandum-account balance. SJWC recorded a $9.4 million write-off for 2018 and reversed $0.6 million of 2019 balances.
- Merger-related expenses were $15.8 million in 2019. SJW Group acquired CTWS for approximately $838.5 million in cash, financed principally with its 2018 equity issuance and 2019 debt financing. Preliminary purchase accounting recorded $628.3 million of goodwill; allocation remained subject to refinement.
- The acquisition increased assets to $3.13 billion from $1.96 billion and substantially increased debt. CTWS contributed $21.7 million in revenue and a $3.2 million pretax loss from acquisition through year-end.
Outlook, risks and contingencies
- Management planned approximately $225.9 million of company-funded capital improvements in 2020 and $1.19 billion over five years, subject to regulatory approvals. SJWC’s 2020 authorized revenue requirement increased by $8.6 million, effective January 1, 2020.
- SJW Group said its water supplies were expected to meet 2020 customer demand. California remains exposed to drought, changing supply mix and purchased-water and groundwater costs; the company also faces weather-driven seasonality and conservation-related demand risks.
- SJWC requested CPUC approval for advanced metering infrastructure, with proposed revenue increases during 2021–2024; a decision was anticipated in fourth-quarter 2020. Maine Water also had a rate application pending at year-end; subsequent WISC surcharges were approved in February 2020.
- The CPUC merger investigation remained a risk: the merger closed before that investigation concluded, and the company could not predict potential conditions or costs. Integration execution, higher leverage, regulatory decisions, water quality and supply, wildfires, natural disasters, cyber incidents and pension obligations are other material risks.
- A settlement of SJWC’s historical billing-practice matter provided for approximately $2.1 million in customer credits and $5.0 million of utility investment without return or rate recovery. The CPUC approved a modified settlement in February 2020. A separate CTWS-merger shareholder suit was dismissed, with a $325,000 mootness fee agreed in January 2020.
- The independent auditor issued unqualified opinions on the financial statements and internal control. The internal-control assessment excluded CTWS, which represented $970 million of assets and $21.7 million of 2019 revenue included in SJW Group’s statements.
Key facts for investors to verify
- How much of 2019’s revenue and cash-flow growth reflects the partial-year CTWS consolidation, and how do pro forma combined results compare? The filing’s unaudited pro forma figures show 2019 revenue of $515.2 million and net income of $57.0 million, but are not a forecast.
- Whether integration costs, synergies and acquired-asset purchase accounting develop as expected, and whether goodwill or other acquisition values require adjustment.
- Debt service capacity, available credit, covenant headroom and the sustainability of dividends given the 146% dividend payout relative to 2019 net income.
- Future CPUC action on the merger investigation and recovery of regulatory balances, particularly following the water-conservation account disallowance.
- Capital-spending execution and regulatory approval of planned projects and rate recovery, including the advanced-metering application.