SJW Group Announces 2018 Annual and Fourth Quarter Financial Results

SAN JOSE, Calif.–(BUSINESS WIRE)–SJW Group (NYSE: SJW) today reported financial results for the annual
and fourth quarter ended December 31, 2018. SJW Group net income was
$38.8 million for the year ended December 31, 2018, compared to $59.2
million for the same period in 2017. Diluted earnings per share were
$1.82 and $2.86 for the years ended December 31, 2018 and 2017,
respectively. Diluted earnings per share in 2018 includes $2.51 per
share from recurring operations offset by $0.69 per share related to the
company’s activities around the proposed merger with Connecticut Water
Service, Inc (“CTWS”). Diluted earnings per share in 2017 includes $2.33
per share from recurring operations plus $0.53 per share related to
property sales and the sale of Texas Water Alliance Limited (“TWA”).

Operating revenue was $397.7 million for the year ended December 31,
2018 compared to $389.2 million in 2017. The $8.5 million increase in
revenue was primarily attributable to a $28.9 million increase in
cumulative water rate changes, offset by approximately $4.3 million rate
decrease from our 2018 cost of capital proceeding and $7.0 million from
the federal rate change related to the implementation of the Tax Cuts
and Jobs Act (H.R.1) (the “Tax Act”), $7.8 million increase in customer
usage, and $2.6 million increase in revenue from new customers. The
increase was partially offset by a $19.3 million decrease in the net
recognition of certain balancing and memorandum accounts, which includes
$3.9 million in cost-recovery accounts that were recorded in revenue in
2017 and which upon adoption of Accounting Standard Codification Topic
606, “Revenue from Contracts with Customers” on January 1, 2018 are now
recorded as capitalized costs until recovery is approved by the
California Public Utilities Commission.

Water production expenses for the year ended December 31, 2018 were
$168.7 million compared to $158.1 million in 2017, an increase of $10.6
million. The increase in water production expenses was attributable to
$14.9 million in higher per unit costs for purchased water, groundwater
extraction and energy charges, partially offset by $1.4 million related
to cost-recovery balancing and memorandum accounts, and $5.1 million in
increased customer usage. The increase was partially offset by $8.0
million due to an increase in the use of available surface water
supplies. Operating expenses, excluding water production costs,
increased $26.3 million to $155.5 million from $129.2 million. The
increase was primarily due to $18.6 million in merger expenses related
to our proposed CTWS transaction, $6.3 million in higher depreciation
expenses due to assets placed in service in 2017, and $1.3 million in
higher property taxes and other non-income taxes.

Other expense and income in 2017 included a pre-tax gain of $12.5
million related to the sale of TWA to the Guadalupe-Blanco River
Authority, a pre-tax gain of $6.3 million on the sale of 444 West Santa
Clara Street Limited Partnership’s interests in the commercial building
and land the partnership owned, and sale of undeveloped land which SJW
Land Company owned for a pre-tax gain of $580,000. There were no
significant real estate transactions in 2018.

The effective consolidated income tax rates were approximately 21% and
37% for the years ended December 31, 2018 and 2017, respectively. The
effective tax rate decreased primarily due to the change in the
statutory federal income tax rate from 35% to 21% as a result of the Tax
Act.

Fourth Quarter Financial Results

Net income for the fourth quarter ended December 31, 2018 was $8.8
million, compared to $17.3 million in 2017. Diluted earnings per share
were $0.38 and $0.84 for the quarters ended December 31, 2018 and 2017,
respectively. Diluted earnings per share includes $0.50 per share from
recurring operations offset by $0.12 per share related to the company’s
activities around the proposed CTWS transaction. Diluted earnings per
share in 2017 includes $0.43 per share from recurring operations plus
$0.41 per share from the sale of TWA.

Operating revenue was $98.7 million in the quarter compared to $93.5
million in 2017. The $5.2 million increase in revenue was attributable
to $8.0 million in cumulative rate increases, offset by approximately
$1.5 million rate decrease from our 2018 cost of capital proceeding and
$3.8 million from the federal rate change related to the implementation
of the Tax Act, a $1.3 million increase in the net recognition of
certain balancing and memorandum accounts, which includes $1.1 million
in higher revenue recorded in our Water Conservation Memorandum Account
and $1.0 million in other balancing and memorandum accounts, partially
offset by $770,000 decrease related to the implementation of the Tax
Act. In addition, the increase was attributable to $827,000 in revenue
from new customers and $412,000 in higher customer usage.

Water production expenses for the fourth quarter of 2018 were $43.3
million versus $39.5 million for the same period in 2017, an increase of
$3.8 million. The increase in water production expenses was primarily
attributable to $3.9 million in higher per unit costs for purchased
water, groundwater extraction and energy charges, $1.7 million related
to cost-recovery balancing and memorandum accounts and $455,000 in
higher customer water usage, offset by $2.3 million in lower expenses
due to an increase in the use of available surface water supplies.
Operating expenses, excluding water production costs, increased $3.1
million to $38.0 million from $34.9 million. The increase was primarily
due to $3.6 million in merger expenses related to our proposed CTWS
transaction, $1.6 million in higher depreciation expenses, and $261,000
in higher property taxes and other non-income taxes. These increases
were partially offset by $1.4 million in lower administrative and
general expenses, net of cost-recovery balancing and memorandum
accounts, and $1.0 million in lower maintenance expenses.

Other expense and income in the fourth quarter of 2017 included a
pre-tax gain of $12.5 million related to the sale of TWA to the
Guadalupe-Blanco River Authority. No similar sale occurred in 2018.

The effective consolidated income tax rates were 22% and 33% for the
quarters ended December 31, 2018 and 2017, respectively. The effective
tax rate decreased in 2018 primarily due to the change in the statutory
federal income tax rate from 35% to 21% as a result of the Tax Act.

CTWS Merger

On August 5, 2018, SJW Group entered into a Second Amended and Restated
Agreement and Plan of Merger for the proposed merger of CTWS by SJW
Group. Among other conditions, the transaction is subject to approval by
certain regulators, including the Connecticut Public Utilities
Regulatory Authority (“PURA”) and the Maine Public Utilities Commission
(“MPUC”).

On December 3, 2018, PURA issued a proposed final decision denying
approval of the SJW Group and CTWS joint application, and on January 9,
2019, and January 23, 2019, respectively, the companies withdrew their
applications before PURA and MPUC. After a thorough review conducted by
the management and boards of both companies, and with the support of
their respective local Connecticut regulatory counsel, SJW Group and
CTWS have decided to file new applications with PURA and MPUC which are
intended to address PURA’s concerns. The new applications are expected
to be filed during the second quarter of 2019.

In connection with the proposed CTWS merger transaction, SJW Group
issued approximately 7.8 million new SJW shares in an offering that
closed on December 5, 2018. The share issuance raised approximately $412
million of net proceeds intended to finance approximately 50% of the
proposed CTWS transaction. If the transaction does not close, the
proceeds will be used for general corporate purposes.

SJW Group is a publicly traded holding company headquartered in San
Jose, California. SJW Group is the parent company of San Jose Water
Company, SJWTX, Inc., and SJW Land Company. Together, San Jose Water
Company and SJWTX, Inc. provide water service to more than one million
people in San Jose, California and nearby communities and in Canyon
Lake, Texas and nearby communities. SJW Land Company owns and operates
commercial real estate investments.

This press release may contain certain forward-looking statements
including, but not limited to, statements relating to SJW Group’s plans,
strategies, objectives, expectations and intentions, which are made
pursuant to the safe harbor provisions of the U.S. Private Securities
Litigation Reform Act of 1995.
These forward-looking statements
involve known and unknown risks, uncertainties and other factors which
may cause the actual results, performance or achievements of SJW Group
to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.

The accuracy of such statements is subject to a number of risks,
uncertainties and assumptions including, but not limited to, the
following factors: (1) the risk that the conditions to the closing of
the proposed transaction between SJW Group and Connecticut Water (the
“Merger”) are not satisfied; (2) the risk that the regulatory approvals
required for the Merger are not obtained at all, or if obtained, on the
terms expected or on the anticipated schedule; (3) the risk that the
California Public Utilities Commission’s (“CPUC”) investigation may
cause delays in or otherwise adversely affect the Merger and that SJW
Group may be required to consummate the Merger prior to the CPUC’s
issuance of an order with respect to its investigation; (4) the effect
of water, utility, environmental and other governmental policies and
regulations; (5) litigation relating to the Merger; (6) the occurrence
of any event, change or other circumstance that could give rise to the
termination of the merger agreement between the parties to the Merger;
(7) changes in demand for water and other products and services; (8)
unanticipated weather conditions; (9) catastrophic events such as fires,
earthquakes, explosions, floods, ice storms, tornadoes, terrorist acts,
physical attacks, cyber-attacks, or other similar occurrences that could
adversely affect the facilities, operations, financial condition,
results of operations and reputation of SJW Group or CTWS; (10) risks
that the Merger disrupts the current plans and operations of SJW Group
or CTWS; (11) potential difficulties by SJW Group or CTWS in employee
retention as a result of the Merger; (12) unexpected costs, charges or
expenses resulting from the Merger; (13) risks related to diverting
management’s attention from ongoing business operations of SJW Group or
CTWS; and (14) legislative and economic developments.

Results for a quarter are not indicative of results for a full year
due to seasonality and other factors.
Other factors that may
cause actual results, performance or achievements to materially differ
are described in SJW Group’s most recent reports on Form 10-K, Form 10-Q
and Form 8-K filed with the Securities and Exchange Commission.
SJW
Group undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information,
future events or otherwise.

 
SJW Group
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(in thousands, except per share data)
 
  Three months ended December 31,   Twelve months ended December 31,
2018   2017 2018   2017
REVENUE $ 98,718 93,529 $ 397,699 389,225
OPERATING EXPENSE:
Production Expenses:
Purchased water 24,705 19,518 97,378 86,456
Power 1,406 1,804 6,180 7,295
Groundwater extraction charges 12,429 13,719 46,770 47,817
Other production expenses 4,724   4,505   18,398   16,571  
Total production expenses 43,264 39,546 168,726 158,139
Administrative and general 12,655 14,031 48,933 48,940
Maintenance 4,378 5,370 18,414 18,361
Property taxes and other non-income taxes 3,643 3,382 14,975 13,642
Depreciation and amortization 13,680 12,075 54,601 48,292
Merger related expenses 3,616     18,610    
Total operating expense 81,236   74,404   324,259   287,374  
OPERATING INCOME 17,482 19,125 73,440 101,851
OTHER (EXPENSE) INCOME:
Interest expense (6,119 ) (5,575 ) (24,332 ) (22,929 )
Unrealized loss on California Water Service Group stock (527 )
Gain on sale of real estate investment 6,903
Gain on sale of equity interests in Texas Water Alliance Limited and
utility property
12,499 9 12,499
Pension non-service cost (589 ) (911 ) (2,356 ) (3,772 )
Other, net 523   505   2,598   1,941  
Income before income taxes 11,297 25,643 48,832 96,493
Provision for income taxes 2,474   8,338   10,065   35,393  
NET INCOME BEFORE NONCONTROLLING INTEREST 8,823 17,305 38,767 61,100
Less net income attributable to the noncontrolling interest       1,896  
SJW GROUP NET INCOME 8,823 17,305 38,767 59,204
Other comprehensive income, net   427     679  
SJW GROUP COMPREHENSIVE INCOME $ 8,823   17,732   $ 38,767   59,883  
 
SJW GROUP EARNINGS PER SHARE:
Basic $ 0.38 0.84 $ 1.83 2.89
Diluted $ 0.38 0.84 $ 1.82 2.86
DIVIDENDS PER SHARE $ 0.28 0.39 $ 1.12 1.04
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 23,056 20,521 21,214 20,507
Diluted 23,143 20,714 21,332 20,685
 
SJW Group
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
 
  December 31,   December 31,
2018 2017
ASSETS
Utility plant:
Land $ 18,296 17,831
Depreciable plant and equipment 1,833,051 1,714,228
Construction in progress 68,765 45,851
Intangible assets 15,799   14,413
Total utility plant 1,935,911 1,792,323
Less accumulated depreciation and amortization 607,090   553,059
Net utility plant 1,328,821   1,239,264
 
Real estate investments 56,336 56,213
Less accumulated depreciation and amortization 12,327   11,132
Net real estate investments 44,009   45,081
CURRENT ASSETS:
Cash and cash equivalents:
Cash 8,722 7,799
Money market fund 412,000
Accounts receivable and accrued unbilled utility revenue 50,219 54,309
Current regulatory assets, net 26,910
Other current assets 4,871   4,750
Total current assets 502,722   66,858
OTHER ASSETS:
Investment in California Water Service Group 4,535
Regulatory assets, net 76,715 99,554
Other 4,122   2,709
80,837   106,798
$ 1,956,389   1,458,001
 
SJW Group
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
 
  December 31,   December 31,
2018 2017
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common stock $ 28 21
Additional paid-in capital 495,366 84,866
Retained earnings 393,918 376,119
Accumulated other comprehensive income   2,203
Total stockholders’ equity 889,312 463,209
Long-term debt, less current portion 431,424   431,092
Total capitalization 1,320,736   894,301
CURRENT LIABILITIES:
Lines of credit 100,000 25,000
Accrued groundwater extraction charges, purchased water and power 13,694 14,382
Accounts payable 24,937 22,960
Accrued interest 7,132 6,869
Accrued payroll 7,181 6,011
Other current liabilities 11,041   9,830
Total current liabilities 163,985   85,052
 
DEFERRED INCOME TAXES 79,651 85,795
ADVANCES FOR CONSTRUCTION AND CONTRIBUTIONS IN AID OF
CONSTRUCTION 248,853 244,525
POSTRETIREMENT BENEFIT PLANS 70,490 72,841
REGULATORY LIABILITY 59,149 62,476
OTHER NONCURRENT LIABILITIES 13,525   13,011
$ 1,956,389   1,458,001

Contacts

SJW Group
Suzy Papazian, 408-279-7961
General Counsel and
Corporate Secretary

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