SJW (SJW) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements SJW Group reported decreased net income for Q2 and H1 2022, with growth in utility plant assets and increased operating cash flow Condensed Consolidated Statements of Comprehensive Income | Metric | Three Months Ended June 30, 2022 (in thousands) | Three Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $149,041 | $152,241 | $273,343 | $267,026 | | Operating Income | $26,402 | $32,639 | $42,991 | $45,718 | | Net Income | $11,558 | $20,775 | $15,295 | $23,391 | | Diluted EPS | $0.38 | $0.69 | $0.50 | $0.79 | | Dividends Per Share | $0.36 | $0.34 | $0.72 | $0.68 | Condensed Consolidated Balance Sheets | Balance Sheet Item | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :--- | :--- | :--- | | Total Assets | $3,541,047 | $3,492,395 | | Net Utility Plant | $2,553,781 | $2,497,499 | | Cash and Cash Equivalents | $12,049 | $10,908 | | Goodwill | $640,311 | $640,471 | | Total Liabilities & Capitalization | $3,541,047 | $3,492,395 | | Total Stockholders' Equity | $1,029,845 | $1,034,519 | | Long-Term Debt, less current portion | $1,455,709 | $1,492,935 | | Line of Credit | $141,336 | $62,996 | Condensed Consolidated Statements of Cash Flows | Cash Flow Activity (Six Months Ended June 30) | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $83,598 | $67,096 | | Net Cash Used in Investing Activities | ($117,131) | ($107,005) | | Net Cash Provided by Financing Activities | $34,065 | $58,741 | | Net Change in Cash | $532 | $18,832 | Notes to Financial Statements - Revenue from contracts with customers for the six months ended June 30, 2022, was $270.4 million, up from $259.4 million in the prior-year period[34] - Total net regulatory assets decreased to $142.2 million as of June 30, 2022, from $154.6 million at year-end 2021, primarily due to changes in balancing and memorandum accounts[43] - The company's Water Utility Services segment generated operating revenue of $147.7 million in Q2 2022, while the Real Estate Services segment generated $1.4 million[66] - Subsequent to the quarter end, on July 14, 2022, subsidiary SJWC entered into a note purchase agreement to sell $70 million of its 4.85% Senior Notes, Series P, due 2053[69] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes a 35% decrease in year-to-date net income to specific factors, while revenue increased 2% and operating expenses rose 4%, with solid liquidity supporting future capital expenditures Results of Operations - Consolidated net income for the six months ended June 30, 2022, was $15.3 million, a decrease of $8.1 million (35%) from the same period in 2021, including a $4.45 million gain on a nonutility property sale, offset by $1.96 million in depreciation and $1.71 million in settlement expenses[88] | Revenue Change Drivers (Six Months 2022 vs 2021) | Amount Change (in thousands) | % Change | | :--- | :--- | :--- | | Consumption Changes | $(4,829) | (2)% | | Increase in Customers | $2,881 | 1% | | Rate Increases | $12,687 | 5% | | Other Regulatory Mechanisms | $(5,498) | (2)% | | Total Change | $6,317 | 2% | - Operating expenses for the first six months of 2022 increased by $9.0 million (4%) compared to 2021, driven by a $5.9 million increase in depreciation and amortization and a $3.6 million increase in administrative and general expenses, partially offset by a $5.45 million gain on the sale of nonutility properties[90][103] Sources of Water Supply - California is experiencing a severe drought, with Santa Clara Valley Water District's reservoirs at 22% of total capacity as of July 1, 2022, leading SJWC to activate its Water Shortage Contingency Plan for a mandatory 15% reduction in water consumption[92][94][151] | Water Source | Six Months Ended June 30, 2022 (in million gallons) | Six Months Ended June 30, 2021 (in million gallons) | % Change | | :--- | :--- | :--- | :--- | | Purchased water | 9,038 | 9,257 | (2.4)% | | Groundwater | 8,920 | 10,567 | (15.6)% | | Surface water | 5,287 | 4,475 | 18.1% | | Total | 23,617 | 24,627 | (4.1)% | Regulation and Rates - California: SJWC's General Rate Case settlement agreement, if approved, provides for a revenue increase of $54.1 million over three years, starting with a $25.1 million increase in 2022, with a final decision expected in Q4 2022 and rates retroactive to January 1, 2022[107][108] - Connecticut: Effective April 1, 2022, a 2.85% surcharge was imposed on customer bills to collect a 2021 revenue shortfall under the Water Rate Adjustment (WRA) mechanism[114] - Maine: A rate increase of $6.3 million (72.5%) for the Biddeford Saco division went into effect on July 1, 2022, related to the new Saco River Drinking Water Resource Center[119] Liquidity and Capital Resources - Cash flow from operations increased to $83.6 million for the first six months of 2022, up from $67.1 million in the prior year period, primarily due to changes in regulatory assets[122] - The company plans approximately $1.3 billion in capital expenditures over the next five years to upgrade and maintain its water systems, with the 2022 budget at approximately $223 million, of which $101.6 million (46%) was invested as of June 30, 2022[125][126] - As of June 30, 2022, the company had $141.3 million outstanding on its lines of credit, with $118.7 million of unused capacity available for short-term financing needs[130] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks primarily from changes in interest rates, which affect its variable-rate debt, and fluctuations in pension plan asset values - SJW Group's primary market risks include changes in interest rates on variable-rate debt and the impact of investment returns, discount rates, and mortality rates on its pension plans[141] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting during the second quarter - Based on an evaluation as of the end of the reporting period, the CEO and CFO concluded that the company's disclosure controls and procedures are effective[143][144] - There were no changes in internal control over financial reporting during the second quarter of 2022 that materially affected, or are reasonably likely to materially affect, internal controls[145] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company reports that it is subject to ordinary routine litigation incidental to its business but has no pending legal proceedings expected to have a material effect on its financial condition or results of operations - SJW Group is not a party to any pending legal proceedings that are expected to have a material effect on its business, financial position, results of operations, or cash flows[148] Item 1A. Risk Factors The company highlights key risks including severe drought impacts, ongoing COVID-19 pandemic effects, and rising inflation, which could adversely affect revenues and increase costs - The severe drought in California has led to mandatory 15% water conservation measures, which are expected to result in lower water usage and may adversely affect operating results, with lost revenues tracked in a memorandum account for potential future recovery, though not guaranteed[151][153][154] - The COVID-19 pandemic continues to pose risks, including potential utility termination moratoriums, supply chain disruptions, and labor issues, with some related costs expected to be recovered through rate-making, but regulatory approval is not certain[158][160][163] - Rising inflation presents a risk by increasing the company's overall cost structure, including interest rates, capital costs, and labor, and the company may not be able to secure rate increases sufficient to cover these higher costs in a timely manner[165] Item 5. Other Information On July 27, 2022, the Board of Directors declared a regular quarterly dividend of $0.36 per share of common stock, payable on September 1, 2022, to stockholders of record as of August 8, 2022 - The Board of Directors declared a quarterly dividend of $0.36 per share on July 27, 2022[166]