SJW Group Announces 2018 Third Quarter Financial Results

SJW Group (NYSE: SJW) today reported financial results for the third quarter ended September 30, 2018. SJW Group net income was $15.8 million for the quarter ended September 30, 2018, compared to $19.5 million for the same period in 2017. Diluted earnings per share were $0.76 and $0.94 for the quarters ended September 30, 2018 and 2017, respectively. Diluted earnings per share includes $1.08 per share from recurring operations offset by $0.32 per share related to the company's activities around the proposed combination with Connecticut Water Service, Inc.

Operating revenue was $124.9 million for the quarter ended September 30, 2018 compared to $124.6 million in the same period in 2017. The $300,000 increase in revenue was primarily attributable to a $3.1 million increase in cumulative water rate changes, net of approximately $1.8 million rate decrease from our 2018 cost of capital proceeding and $3.2 million from the federal rate change related to the implementation of the Tax Cuts and Jobs Act (H.R.1) (the "Tax Act"), and $1.0 million increase in revenue from new customers. The increase was partially offset by a $3.1 million decrease in the net recognition of certain balancing and memorandum accounts, which includes $2.5 million in cost-recovery accounts that were recorded in revenue in 2017 which upon adoption of 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, and a decrease in customer usage of $752,000.

Water production expenses for the third quarter of 2018 were $55.1 million compared to $53.3 million for the same period in 2017, an increase of $1.8 million. The increase in water production expenses was attributable to $4.9 million in higher per unit costs for purchased water, groundwater extraction and energy charges, partially offset by $2.4 million related to cost-recovery balancing and memorandum accounts and $1.0 million due to an increase in the use of available surface water supplies. Operating expenses, excluding water production costs, increased $11.8 million to $43.9 million from $32.1 million. The increase was primarily due to $8.4 million in merger expenses related to our proposed combination with Connecticut Water Service, Inc., $1.6 million of higher depreciation expenses due to assets placed in service in 2017, $935,000 in higher maintenance and property taxes and other non-income taxes, and $803,000 of higher administrative and general expenses, net of cost-recovery balancing and memorandum accounts.

The effective consolidated income tax rates were approximately 21% and 41% for the quarters ended September 30, 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.

Year-to-date net income was $29.9 million, compared to $41.9 million in 2017. Diluted earnings per share were $1.45 in the first nine months of 2018, compared to $2.03 per diluted share for the same period in 2017. Diluted earnings per share includes $2.03 per share from recurring operations offset by $0.58 per share related to the company's activities around the proposed combination with Connecticut Water Service, Inc. In addition, the company's diluted earnings per share for 2017 includes $0.15 per share from real estate transactions that did not re-occur in 2018.

Year-to-date operating revenue increased by $3.3 million to $299.0 million from $295.7 million in the first nine months of 2018. The increase was attributable to $14.9 million in cumulative rate increases, net of approximately $2.8 million rate decrease from our 2018 cost of capital proceeding and $3.2 million from the federal rate change related to the implementation of the Tax Act, $7.4 million in higher customer usage, and $1.8 million in revenue from new customers. These increases were partially offset by a $20.6 million decrease in the net recognition of certain balancing and memorandum accounts, which includes $6.7 million related to the implementation of the Tax Act, $6.5 million in lower revenue recorded in our Water Conservation Memorandum Account, $4.2 million related to cost-recovery accounts, an additional $1.4 million related to the outcome of our cost of capital proceeding, and $1.4 million related to a redistribution of certain customer accounts between residential and business customers for the year ended December 31, 2016 that was recorded in the 2017 first quarter.

Year-to-date water production expenses increased to $125.4 million from $118.6 million in 2017. The $6.8 million increase was attributable to $11.0 million in higher per unit costs for purchased water, groundwater extraction and energy charges and $4.6 million in higher customer water usage, offset by $5.7 million in lower expenses due to an increase in the use of available surface water supplies and $3.1 million related to cost-recovery balancing and memorandum accounts. Operating expenses, excluding water production costs, increased $23.2 million to $117.6 million from $94.4 million. The increase was primarily due to $15.0 million in merger expenses related to our proposed combination with Connecticut Water Service, Inc., $4.7 million in higher depreciation expenses, $2.1 million in higher maintenance and property taxes and other non-income taxes, and $1.4 million in higher administrative and general expenses, net of cost-recovery balancing and memorandum accounts.

Other expense and income in the first nine months of 2017 included 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.

The effective consolidated income tax rates were approximately 20% and 38% for the nine-month periods ended September 30, 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.

The Directors of SJW Group today declared a quarterly dividend on common stock of $0.28 per share. The dividend is payable on December 3, 2018 to shareholders of record on November 5, 2018.

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. 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									Nine months ended
				September 30,									September 30,
				2018					2017				2018					2017
REVENUE				$	124,853				124,578				$	298,981				295,696
OPERATING EXPENSE:
Production Expenses:
Purchased water				33,545					30,833				72,673					66,938
Power				1,882					2,500				4,774					5,491
Groundwater extraction charges				14,890					15,756				34,341					34,098
Other production expenses				4,836					4,216				13,674					12,067
Total production expenses				55,153					53,305				125,462					118,594
Administrative and general				12,752					11,949				36,278					34,909
Maintenance				4,980					4,607				14,036					12,991
Property taxes and other non-income taxes				4,016					3,454				11,332					10,260
Depreciation and amortization				13,682					12,065				40,921					36,217
Merger related expenses				8,442					—				14,994					—
Total operating expense				99,025					85,380				243,023					212,971
OPERATING INCOME				25,828					39,198				55,958					82,725
OTHER (EXPENSE) INCOME:
Interest expense				(6,077		)			(5,541	)			(18,213		)			(17,354	)
Unrealized loss on California Water Service Group stock				—					—				(527		)			—
Gain on sale of real estate investment				—					—				—					6,903
Pension non-service cost				(589		)			(953	)			(1,767		)			(2,860	)
Other, net				729					359				2,084					1,436
Income before income taxes				19,891					33,063				37,535					70,850
Provision for income taxes				4,103					13,523				7,591					27,055
NET INCOME BEFORE NONCONTROLLING INTEREST				15,788					19,540				29,944					43,795
Less net income attributable to the noncontrolling interest				—					—				—					1,896
SJW GROUP NET INCOME				15,788					19,540				29,944					41,899
Other comprehensive income, net				—					80				—					252
SJW GROUP COMPREHENSIVE INCOME				$	15,788				19,620				$	29,944				42,151
SJW GROUP EARNINGS PER SHARE:
Basic				$	0.77				0.95				$	1.45				2.04
Diluted				$	0.76				0.94				$	1.45				2.03
DIVIDENDS PER SHARE				$	0.28				0.22				$	0.84				0.65
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic				20,627					20,516				20,594					20,502
Diluted				20,732					20,697				20,722					20,675

SJW Group
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
				September 30,					December 31,
				2018					2017
ASSETS
Utility plant:
Land				$	18,300				17,831
Depreciable plant and equipment				1,783,654					1,714,228
Construction in progress				79,475					45,851
Intangible assets				15,748					14,413
Total utility plant				1,897,177					1,792,323
Less accumulated depreciation and amortization				593,916					553,059
Net utility plant				1,303,261					1,239,264
Real estate investments				56,336					56,213
Less accumulated depreciation and amortization				12,029					11,132
Net real estate investments				44,307					45,081
CURRENT ASSETS:
Cash and cash equivalents				13,327					7,799
Accounts receivable and accrued unbilled utility revenue				61,518					54,309
Other current assets				5,522					4,750
Total current assets				80,367					66,858
OTHER ASSETS:
Investment in California Water Service Group				—					4,535
Regulatory assets, net				104,670					99,554
Other				4,263					2,709
				108,933					106,798
				$	1,536,868				1,458,001

SJW Group
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
				September 30,					December 31,
				2018					2017
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common stock				$	21				21
Additional paid-in capital				84,045					84,866
Retained earnings				390,891					376,119
Accumulated other comprehensive income				—					2,203
Total stockholders’ equity				474,957					463,209
Long-term debt, less current portion				431,341					431,092
Total capitalization				906,298					894,301
CURRENT LIABILITIES:
Line of credit				76,000					25,000
Accrued groundwater extraction charge, purchased water and purchased power				22,856					14,382
Accounts payable				26,956					22,960
Accrued interest				7,402					6,869
Accrued payroll				4,568					6,011
Other current liabilities				13,898					9,830
Total current liabilities				151,680					85,052
DEFERRED INCOME TAXES				80,901					85,795
ADVANCES FOR CONSTRUCTION AND CONTRIBUTIONS IN AID OF CONSTRUCTION				247,893					244,525
POSTRETIREMENT BENEFIT PLANS				75,877					72,841
REGULATORY LIABILITY				60,650					62,476
OTHER NONCURRENT LIABILITIES				13,569					13,011
				$	1,536,868				1,458,001

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