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SG

SJW GROUP (SJW)·Q2 2024 Earnings Summary

Executive Summary

  • SJW delivered solid Q2 performance: revenue $176.2M (+12% YoY) and diluted EPS $0.64 (+10% YoY); adjusted diluted EPS $0.66 (+14% YoY), supported by rate increases and higher usage, partially offset by higher water production costs .
  • Constructive regulatory progress: reached an all‑party settlement in principle in California’s 2025–2027 GRC (decision expected Q4’24, effective Jan 1, 2025) and received a final PURA decision in Connecticut with $6.5M annualized revenue increase and 9.3% ROE .
  • 2024 guidance updated: GAAP diluted EPS $2.66–$2.76 and reaffirmed adjusted diluted EPS $2.68–$2.78; equity issuance $55–$65M; five‑year capex plan of $1.6B, including ~$230M PFAS investments .
  • Texas drought escalated to Stage 4 irrigation restrictions; management affirmed full‑year EPS guidance but flagged usage risk (Texas ~5% of business) .
  • Consensus estimates from S&P Global were unavailable due to mapping issues; therefore, beat/miss vs Street cannot be quantified (Values would be retrieved from S&P Global if available).

What Went Well and What Went Wrong

What Went Well

  • Rate and regulatory tailwinds: all‑party settlement in California’s GRC (most issues resolved) and PURA decision in CT with higher authorized ROE; CPUC approvals for wholesale cost pass‑through and AMI rate base addition .
  • Strong operational execution: revenue up 12% YoY to $176.2M; operating income up to $40.6M; diluted EPS up to $0.64; adjusted EPS $0.66; effective tax rate normalization vs prior year .
  • Capital deployment and cost discipline: $158M YTD capex (48% of 2024 plan); A&G down $3.1M in Q2, aided by arrearage relief and collections; expanding AMI and leak detection to reduce losses and customer leaks .
    “Across the enterprise, we invested $158 million in water and wastewater utility infrastructure… and we also delivered earnings per diluted share of $0.64 and adjusted… $0.66 in the second quarter.” — Eric Thornburg .

What Went Wrong

  • Water production costs rose: total production expenses up to $70.5M (+14% YoY) driven by wholesale rates and usage; depreciation and maintenance also increased .
  • Connecticut recovery short of ask: ~$6.5M annualized increase granted vs $21.4M request; ~$3.9M in unrecovered expenses; management expects more work to secure future recovery mechanisms .
  • Texas drought risk: Stage 4 restrictions and Canyon Lake at ~55% capacity; potential usage headwinds into 2H, though EPS guidance maintained for now .

Financial Results

Consolidated P&L vs prior periods

MetricQ4 2023Q1 2024Q2 2024
Operating Revenue ($USD Millions)$171.338 $149.382 $176.174
Operating Income ($USD Millions)$36.493 $27.913 $40.570
Net Income ($USD Millions)$18.949 $11.699 $20.696
Diluted EPS ($USD)$0.59 $0.36 $0.64
Adjusted Diluted EPS ($USD)N/AN/A$0.66
Operating Expenses ($USD Millions)$134.845 $121.469 $135.604
Effective Tax Rate (%)~9% ~16% ~15%
Operating Margin (%)21.3% (calc from )18.7% (calc from )23.0% (calc from )

Notes: Margins are calculated from cited revenue and operating income.

Production expense breakdown

Component ($USD Millions)Q4 2023Q1 2024Q2 2024
Purchased Water$34.928 $26.192 $38.129
Power$2.239 $2.427 $2.737
Groundwater Extraction Charges$16.229 $12.126 $17.552
Other Production Expenses$11.257 $11.049 $12.052
Total Production Expenses$64.653 $51.794 $70.470

Additional KPIs

KPIQ2 2024 / YTD
YTD Operating Revenue ($USD Millions)$325.6
YTD Diluted EPS ($USD)$1.00
YTD Adjusted Diluted EPS ($USD)$1.02
YTD Capex ($USD Millions)$158
ATM Equity Raised YTD ($USD Millions)~$33
Line of Credit Drawn ($USD Millions)$217 (out of $350)
Avg LOC Borrowing Rate (Q2)~6.53%
Dividend Declared ($/share)$0.40 (payable 9/3/2024)
Texas Business Mix (%)~5% of SJW

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Diluted EPS (GAAP)FY 2024$2.68–$2.78 $2.66–$2.76 Lowered
Adjusted Diluted EPS (non‑GAAP)FY 2024$2.68–$2.78 $2.68–$2.78 Maintained
Equity Issuance ($USD Millions)FY 2024$55–$65 $55–$65 Maintained
Capex (5‑year) ($USD Billions)2024–2028$1.6 $1.6 Maintained
PFAS Investment ($USD Millions)5‑year~$230 ~$230 Maintained
Dividend ($/share)Q3 2024$0.40 declared $0.40 declared Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4’23 and Q1’24)Current Period (Q2’24)Trend
California GRCFiled Jan 2; constructive CPUC tools (WCMA/WCEMA; WCCM‑adjusted ROE 9.81%) All‑party settlement in principle; decision Q4’24; effective Jan 1, 2025 Improving
Connecticut GRCAnticipated decision late June; full decoupling and WICA support noted Final PURA decision: +$6.5M revenue, ROE 9.3%, performance‑based $1.1M opportunity; ~$3.9M unrecovered expenses Mixed
Texas Drought & GrowthStage 2–4 conditions; strong development pipeline (~22k units) Stage 4 irrigation restrictions; Canyon Lake ~55% capacity; guidance maintained; Texas ~5% of mix Deteriorating usage backdrop
AMI & Leak Detection (Tech/AI)AMI rollout; AI‑guided asset management and leak detection CPUC approved AMI rate base addition (+$4.8M); automated portals & leak alerts; AI in hydrant devices and pipe selection Accelerating deployment
PFAS Compliance~$230M capex plan; supportive regulatory framework expected Continued emphasis within $1.6B plan; proactive wellfield work; pursuit of settlements to offset costs Steady execution
Decoupling in CAWCMA/WCEMA reinstated; WCCM in place Positive Supreme Court ruling; management supportive, watching peer cases Constructive backdrop
Power/Electricity CostsCost pressures acknowledged; cost management initiatives Balancing account in CA; contracted power in CT/ME; solar expansion offsets Mitigating strategies in place

Management Commentary

  • Strategic and regulatory progress: “We reached an agreement in principle on most issues… in our 2025–2027 general rate case [in CA]… we expect the settlement agreement will be filed on or about August 19… and are hopeful the CPUC will approve the settlement later this year.” — Eric Thornburg .
  • Operating momentum: “Operating revenue for the second quarter was $176.2 million… largely driven by rate increases… higher usage… and regulatory mechanism adjustments.” — Andrew Walters .
  • Customer affordability and assistance: “San Jose Water secured $9.1 million in arrearage relief… and PURA approved expanding Connecticut’s WRAP program.” — Eric Thornburg .
  • Technology and efficiency: “We’re installing antennas… customers will have a portal… alerts for continuous usage indicating a leak… first of its kind in California for major water utilities.” — Eric/Andrew .
  • Drought management: “Stage 4 drought declaration… certain counties cannot use water for irrigation… Texas is 5 percent of our overall business… we still feel like we’re on track.” — Eric/Andrew .

Q&A Highlights

  • Texas drought impact: Management cannot yet quantify EPS impact; base case assumptions include drought; will revisit if conditions worsen .
  • Connecticut decision vs growth algorithm: Outcome not additive to LT EPS growth by itself; other parts of the business offset dilution .
  • CA decoupling: Supreme Court ruling viewed positively; Public Advocates Office remains opposed; fixed charge recovery helps; WCMA currently in place .
  • Electricity price recovery: CA balancing account mitigates; CT/ME contract power partly offsets; ongoing solar conversions reduce costs and emissions .
  • AMI scope and benefits: Full automation (not drive‑by); customer portal, leak alerts, reduced truck rolls; AI used for leak detection and pipe replacement planning .

Estimates Context

  • Wall Street consensus (S&P Global Capital IQ) for SJW’s Q2 2024 EPS and revenue was unavailable due to a ticker mapping issue in SPGI/CIQ (tool error). As a result, we cannot quantify a beat/miss vs Street for Q2. If available, we would anchor comparisons on S&P Global consensus and assess magnitude and drivers accordingly.
  • Given regulatory tailwinds (CA settlement in principle, CT decision) and persistent cost pressures (wholesale water, depreciation, Texas drought), we expect analysts to modestly adjust outer‑year assumptions for rates, usage, and cost trajectories, while leaving 2024 guidance largely intact .

Key Takeaways for Investors

  • Q2 delivered clean execution with revenue/EPS growth and constructive regulatory outcomes; the narrative remains rate‑driven earnings growth, tempered by production cost inflation .
  • California GRC settlement in principle is a likely year‑end catalyst; new rates targeted 1/1/2025 — a key medium‑term driver; monitor final decision timing .
  • Connecticut decision is a step forward but highlights regulatory constraints; expect management to pursue mechanisms to smooth recovery (performance‑based revenues, future filings) .
  • Texas drought is a near‑term headwind to usage; business mix (~5%) limits consolidated EPS risk, but it warrants monitoring through Q3/Q4 .
  • Technology initiatives (AMI, AI‑enabled leak detection) and solar deployment should improve efficiency, reduce operating costs, and support affordability — structurally positive for margins over time .
  • 2024 EPS guidance was fine‑tuned (GAAP lowered; adjusted maintained); continued clarity post‑CA decision could re‑rate the stock on regulatory visibility .
  • Dividend continuity (56 consecutive annual raises) and disciplined balance sheet management (LOC, planned long‑term debt issuance) underpin defensive utility characteristics .