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.
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.
|Condensed Consolidated Statements of Comprehensive Income|
|(in thousands, except per share data)|
|Three months ended December 31,||Twelve months ended December 31,|
|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|
|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|
|OTHER (EXPENSE) INCOME:|
|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||)|
|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||$||38,767||59,883|
|SJW GROUP EARNINGS PER SHARE:|
|DIVIDENDS PER SHARE||$||0.28||0.39||$||1.12||1.04|
|WEIGHTED AVERAGE SHARES OUTSTANDING:|
|Condensed Consolidated Balance Sheets|
|December 31,||December 31,|
|Depreciable plant and equipment||1,833,051||1,714,228|
|Construction in progress||68,765||45,851|
|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|
|Cash and cash equivalents:|
|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|
|Investment in California Water Service Group||—||4,535|
|Regulatory assets, net||76,715||99,554|
|Condensed Consolidated Balance Sheets|
|December 31,||December 31,|
|CAPITALIZATION AND LIABILITIES|
|Additional paid-in capital||495,366||84,866|
|Accumulated other comprehensive income||—||2,203|
|Total stockholders’ equity||889,312||463,209|
|Long-term debt, less current portion||431,424||431,092|
|Lines of credit||100,000||25,000|
|Accrued groundwater extraction charges, purchased water and power||13,694||14,382|
|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|
|POSTRETIREMENT BENEFIT PLANS||70,490||72,841|
|OTHER NONCURRENT LIABILITIES||13,525||13,011|