SJW Corp. Form 10-Q Summary — Quarter Ended June 30, 2016
Registrant note: The supplied filing is for SJW Corp., not H2O America. Financial amounts below are in thousands of dollars unless stated otherwise. Water sales are seasonal, so interim results may not indicate full-year performance.
Business context and reporting period
SJW Corp. is a holding company whose principal business is regulated water service through San Jose Water Company in California and Canyon Lake Water Service Company in Texas. It also operates water-related non-tariffed businesses and commercial real estate activities. San Jose Water Company serves about 229,000 connections; the Texas utility serves about 13,000.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $86,944 | $72,402 | $148,056 | $134,514 |
| Operating income | $29,800 | $17,210 | $40,381 | $30,015 |
| Net income | $16,775 | $7,461 | $20,153 | $12,156 |
| Diluted EPS | $0.82 | $0.36 | $0.98 | $0.59 |
| Operating margin | 34.3% | 23.8% | 27.3% | 22.3% |
Revenue rose 20.1% in Q2 and 10.1% in the first half year over year. Management attributed the increases mainly to rate increases and regulatory account revenue, partly offset by lower water usage from conservation. The six-month results also included a $3,197 pretax gain on sale of California Water Service Group shares; after tax, the reported net gain was approximately $1,894. Q2 and first-half revenue included WCMA recognition of $3,518 and $6,512, respectively, and net general-rate-case true-up revenue of $8,706 and $6,830, respectively.
Operating expenses increased 3.5% in Q2 and 3.0% for the first half. Higher purchased-water and groundwater costs and higher depreciation, maintenance, and administrative costs were partly offset by lower water usage and a greater share of lower-cost surface water. Dividend per share was $0.20 for Q2 and $0.41 for the first half.
Cash flow, liquidity, and debt
- First-half operating cash flow was $54,874, compared with $45,018 in 2015.
- Investing activities used $63,751, including $62,859 of company-funded utility-plant additions. Financing activities provided $16,156. Cash increased $7,279 to $12,518.
- At June 30, 2016, the balance sheet showed $364,172 of long-term debt excluding current portion, $11,621 of current long-term debt, and $55,925 drawn on lines of credit. Total recorded borrowings across these items were approximately $431,718.
- Unused short-term credit capacity was $86,075; aggregate facilities totaled $145,000 and mature June 1, 2021. The company reported compliance with applicable covenants. SJW Corp.’s funded debt was 52% of total capitalization; San Jose Water Company’s was 44%.
- Shareholders’ equity was $396,022. The filing reports the fair value of long-term debt at $481,687 versus book value of $375,793.
Material changes, outlook, and risks
- Rates and regulation: The CPUC approved an 8.60% increase in San Jose Water Company’s authorized revenue requirement effective January 1, 2016; updated rates took effect June 14. A separate $9,291 surcharge to recover interim-rate and prior-case under-collections began July 9. A $21,439 revenue increase to recover higher water-supply costs was authorized effective July 1.
- Drought and supply: Conservation reduced consumption, while drought surcharges and WCMA mechanisms offset some lost revenue. The local conservation target was reduced to 20% effective July 1, 2016. Management stated that available supplies were expected to meet customer demand through the rest of 2016; water availability and cost remain important uncertainties.
- Capital program: 2016 Water Utility Services capital expenditures were budgeted at approximately $145,000, with about 43% spent by June 30. The five-year forecast is approximately $618,000, subject to regulatory approval, including $46,900 for Montevina treatment-plant upgrades.
- Proposed TWA sale: SJW agreed to sell Texas Water Alliance for $31,000 cash. Closing depends on conditions including GBRA financing; $3,000 would be held back for four years, subject to reductions. The company cautioned that the sale may not close.
- Real estate: An Arizona warehouse was classified as held for sale at $9,907 carrying value after a negotiated $20,000 settlement with the Arizona Department of Transportation; final settlement was expected by year-end. The company reported no impairment.
- Other risks and outlook: Management provided no earnings guidance. Results remain exposed to seasonal demand, conservation, water-supply conditions and costs, regulatory decisions, variable interest rates, pension-asset values, and equity-price changes. Routine litigation was not expected to have a material effect. A California tax examination covers refund claims for 2008–2012.
Important facts for investors to verify
- Confirm the filing identity: this is SJW Corp.’s 10-Q, despite the H2O America request metadata.
- Assess how much reported earnings growth depended on rate-case true-ups, WCMA recoveries, and the one-time stock-sale gain.
- Track the TWA sale’s financing and closing conditions, including the deferred $3,000 holdback.
- Review subsequent water-supply, conservation, and purchased-water cost developments and related CPUC recovery.
- Monitor execution and regulatory approval of the substantial capital program, credit-facility usage, and debt covenants.