Business context and reporting period
The supplied filing is SJW Corp.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2012—not a filing identified as H2O America. SJW operates regulated and nonregulated water businesses in California and Texas, alongside commercial real estate operations. Unless otherwise noted, financial amounts below are in thousands of dollars.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $65,575 | $59,007 | $116,724 | $102,703 |
| Operating income | $13,585 | $13,784 | $20,310 | $19,385 |
| Net income | $5,201 | $5,451 | $6,310 | $6,061 |
| Diluted EPS | $0.28 | $0.29 | $0.34 | $0.32 |
| Operating margin | 20.7% | 23.4% | 17.4% | 18.9% |
- Revenue grew 11% in Q2 and 14% for the first half. Water Utility Services contributed $64,324 of Q2 revenue and $114,222 for the half-year; real estate contributed $1,251 and $2,502, respectively.
- Q2 net income declined about 5%, while first-half net income increased about 4%. Revenue gains from rate increases and usage were offset by higher production costs and other expenses.
- First-half operating cash flow was $31,650, up from $29,691. Investing used $44,562, including $40,792 of company-funded utility-plant additions; financing used $4,564. Cash fell to $9,258 from $26,734 at year-end 2011.
- At June 30, long-term debt was $335,886, with $8,340 current; total debt carrying value was approximately $344,226. Shareholders’ equity was $264,380. The filing reports $87,000 of unused short-term credit capacity under $90,000 of bank lines.
- Quarterly dividends were $0.18 per share; the board later declared a $0.1775-per-share dividend payable September 4, 2012.
Material changes versus prior period
- Q2 operating expenses rose 15% to $51,990; first-half expenses rose 16% to $96,414. Purchased-water expense increased to $17,783 for Q2 from $12,681, and to $31,360 for the half-year from $20,097.
- Management attributed higher production costs to increased usage, a shift away from lower-cost surface water toward purchased water, and higher unit costs. The Santa Clara Valley Water District increased water prices approximately 9% effective July 2011.
- Administrative and general expense increased $1,088 in Q2 and $2,000 in the first half, reflecting payroll and benefit costs, conservation expenses and, for the half-year, regulatory fees. Depreciation also increased as utility plant expanded.
- Interest on long-term debt increased year over year, principally reflecting senior notes issued in June 2011.
Outlook, risks and unusual items
- Management said water supplies were expected to meet customer demand through the remainder of 2012, but noted below-average rainfall and potential reductions in imported supplies under federal Delta smelt rules; additional longfin smelt restrictions could further affect supply. Water sales and results are seasonal and weather-sensitive.
- The company budgeted $97,813 of 2012 Water Utility Services capital expenditures, with approximately $40,800 spent by June 30. It expected about $579,000 of utility capital expenditures over five years, subject to regulatory approval. A planned Montevina treatment-plant upgrade was estimated at about $73,500 over four years; its regulatory proceeding had been reopened and a decision was expected in 2013.
- A California general rate case sought increases of $47,394 for 2013, $12,963 for 2014 and $34,797 for 2015; a decision was expected in the second half of 2012, with new rates targeted for January 2013. A separate 3% revenue increase to offset supplier cost increases took effect July 1, 2012 and was not intended to increase earnings.
- The company entered a July 12, 2012 agreement to sell its Florida warehouse for $5,821, with closing expected in the third quarter. It classified the property as held for sale at a $4,608 carrying value and recorded no impairment.
- San Jose Water Company expected required and discretionary pension and postretirement contributions of up to $10,500 in 2012; $2,394 had been contributed in the first half. The IRS was examining tax years 2008–2011.
- Texas subsidiary CLWSC’s prior 38% rate increase remained subject to adjustment or refund pending a TCEQ rate-base decision expected in Q4 2012. The filing reports no pending litigation expected to have a material effect.
- Management identified forward-looking statements as subject to risks and uncertainty, including regulation, water availability, weather, costs, financing and capital-project execution. It reported effective disclosure controls and no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the registrant: the supplied filing is for SJW Corp., not H2O America.
- Track CPUC and TCEQ rate-case outcomes, effective dates, and any potential refunds or recovery of balancing and memorandum account balances.
- Monitor water-supply conditions, purchased-water costs and the effect of changes in the supply mix on margins.
- Assess capital-spending plans, funding needs, available credit and the impact of large utility upgrades on debt and cash flow.
- Verify completion and proceeds of the Florida property sale, and follow the IRS examination and pension contribution outlook.