Business context and reporting period
Filing identity: The supplied filing is SJW Corp.’s Form 10-K, not a filing for H2O America. It reports the fiscal year ended December 31, 2011; the filing includes fourth-quarter results but is not a standalone Q4 report. SJW operates regulated water utilities in California and Texas and has a commercial real estate business.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Operating revenue | $239.0 million | $215.6 million |
| Operating income | $54.4 million | $38.1 million |
| Net income | $20.9 million | $24.4 million |
| Basic EPS | $1.12 | $1.32 |
| Cash from operations | $64.2 million | $37.2 million |
| Company-funded capital expenditures | $62.4 million | $95.5 million |
- Operating margin was approximately 22.8%, compared with 17.7% in 2010; net margin was approximately 8.7%, versus 11.3%.
- Cash and cash equivalents were $26.7 million. The company reported $82.0 million of unused short-term credit capacity at year-end, with the credit lines scheduled to expire June 1, 2012.
- Total debt was approximately $344.7 million, and consolidated funded debt was 57% of total capitalization. Shareholders’ equity was $264.0 million.
- The annual dividend was $0.69 per share; dividends paid totaled $12.8 million, or 61% of net income.
- Q4 2011 revenue was $62.3 million and net income was $6.6 million.
Material changes versus the prior comparable period
- Revenue increased 10.8%, driven by approved rate increases, higher customer consumption in drier conditions, and $5.7 million of MCRAM recovery recognized after CPUC approval. Real estate revenue also increased.
- Operating income rose 42.8%, while net income declined 14.4%. The net income comparison was affected by a $19.0 million pretax gain on the sale of California Water Service Group shares in 2010, which did not recur in 2011. The 2010 comparison also included a $3.6 million real estate impairment charge.
- Water production costs increased $4.8 million, including higher purchased-water and groundwater extraction costs. Depreciation and amortization increased $2.9 million as utility plant expanded; interest expense also rose following debt issuance.
- Operating cash flow increased by about $27.0 million. The company issued $50.0 million of 4.35% senior notes due 2021 and ended 2011 with no line-of-credit balance.
- Capital investment continued: utility plant additions and construction in progress grew, while company-funded capital expenditures were lower than the unusually high 2010 level.
Outlook, commentary and risks
- Management projected approximately $105.3 million of capital expenditures for 2012 and about $652.5 million over five years, subject to regulatory approval. Plans include main replacements and upgrades to the Montevina treatment plant, whose estimated project cost is $73.7 million.
- Management expected California water supplies to be sufficient for 2012. However, rainfall was well below seasonal norms during the first half of the 2011–12 rainfall season, and reduced surface-water availability could increase reliance on more costly purchased water and groundwater.
- San Jose Water Company requested rate increases for 2013–2015; approval and timing remained subject to CPUC proceedings. A proposed cost-of-capital settlement was not final. CLWSC’s 38% rate increase remained subject to TCEQ review and possible adjustment or refund.
- Management expected 2012 pension costs of approximately $10.3 million, about $2.2 million above 2011, and pension-plan contributions of approximately $10.3 million, about $2.6 million above 2011.
- Key risks include regulatory lag or disallowance of rate recovery, water availability and cost, weather-driven demand and conservation, rising energy and capital costs, environmental and water-quality requirements, infrastructure failures, natural disasters, pension funding, and real estate market and tenant risks.
- The filing reported no legal proceedings expected to have a material effect. It disclosed legacy mercury at an infrastructure site, which was remediated, with other potentially affected sites to be assessed; management expected no material financial impact. Auditors reported that the financial statements were fairly presented and internal control over financial reporting was effective.
Important facts for investors to verify
- Confirm the issuer and ticker: this filing is for SJW Corp. (NYSE: SJW), not H2O America.
- Track CPUC and TCEQ decisions, including the pending California general rate case and potential refund exposure for CLWSC’s interim increase.
- Assess whether planned capital spending, water-supply conditions, and cost recovery support expected earnings and cash generation.
- Review the June 2012 credit-line expiration and the company’s refinancing and funding plans.
- Monitor pension funding and the effect of higher benefit obligations, along with the sustainability of dividends relative to earnings and investment needs.