Business context and reporting period
This is SJW Corp.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The filing identifies SJW Corp. as the registrant, not H2O America. SJW provides regulated water utility services primarily in California and Texas, alongside non-tariffed services and commercial real estate activities. Water sales are seasonal, with typically higher usage in warmer, drier months.
Financial results
Amounts are in millions of dollars except per-share data. Year-over-year comparisons are with the corresponding 2015 period.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $112.3 | $83.0 | $260.4 | $217.5 |
| Operating income | $36.3 | $18.3 | $76.7 | $48.3 |
| Net income | $19.0 | $9.5 | $39.1 | $21.7 |
| Diluted EPS | $0.92 | $0.46 | $1.90 | $1.06 |
| Operating margin | 32.4% | 22.0% | 29.5% | 22.2% |
| Net margin | 16.9% | 11.5% | 15.0% | 10.0% |
| Operating cash flow | Not provided for quarter | $76.4 | $72.3 |
- Revenue increased 35% in Q3 and 20% year to date. Management attributed the improvement mainly to rate increases, higher Q3 customer usage, WCMA revenue recognition, and year-to-date general rate case true-up revenue.
- Operating expenses rose 17% in Q3 and 9% year to date. Water production costs increased, including following July 2016 increases in purchased-water and groundwater charges. Depreciation also grew with utility plant additions.
- Cash from operations was $76.4 million; investing used $86.7 million, including $102.8 million of company-funded utility plant additions; financing provided $22.7 million. Cash ended the period at $17.7 million.
- At September 30, cash was $17.7 million, line-of-credit borrowings were $63.9 million, current long-term debt was $11.6 million, and long-term debt excluding current portion was $364.2 million. Unused short-term credit capacity was $81.1 million. Shareholders’ equity was $411.6 million.
- Dividends were $0.20 per share in Q3 and $0.61 per share year to date. On October 26, the board declared a $0.2025 quarterly dividend, payable December 1, 2016.
Material changes and unusual items
- Q3 revenue growth included $12.4 million from rate increases, $9.5 million from consumption changes, and $6.6 million of WCMA revenue, according to management’s revenue bridge. Year-to-date revenue included $20.5 million from rate increases, $13.1 million from WCMA, and $6.8 million of 2012 and 2015 general rate case true-ups.
- Year-to-date results included a $3.2 million pretax gain from selling California Water Service Group shares. SJW sold 159,151 shares for $4.5 million and held 100,000 shares at quarter end.
- SJW received a $20.0 million deposit for the Arizona warehouse property taken by eminent domain. Title transferred October 13; the company expected to record an approximately $5.8 million after-tax-and-expense gain in Q4 2016.
- Utility plant increased to $1.64 billion gross from $1.52 billion at year-end 2015. Total assets were $1.45 billion, up from $1.34 billion.
- The company entered into new unsecured credit facilities maturing in 2021. It reported compliance with applicable debt covenants.
Outlook, commentary, and risks
- Management expected available water supplies to meet customer demand through the remainder of 2016. California remained subject to drought-related conservation measures; the local conservation target was reduced to 20% effective July 1, 2016. Water availability and conservation can affect usage, supply mix, costs, and regulatory recovery.
- Management budgeted approximately $145 million of 2016 water-utility capital expenditures and reported $102.8 million spent through September. It projected approximately $618 million of capital expenditures over five years, subject to regulatory approval, including $46.9 million for upgrades to the Montevina Water Treatment Plant.
- The planned sale of Texas Water Alliance to GBRA for $31 million remained subject to closing conditions, including GBRA financing. $3 million of the price would be held back for four years, subject to possible reductions. The filing warns that a delayed or failed closing could adversely affect the company.
- Other risks include regulatory timing and recovery, changes in water purchase and groundwater costs, variable-rate borrowing and market interest rates, pension asset performance, and execution of capital plans. The company reported no pending litigation expected to have a material effect and no material change to previously disclosed risk factors other than the TWA sale risk.
- Management stated that disclosure controls were effective and that there was no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is for SJW Corp., although the request metadata names H2O America.
- Assess how much of the earnings increase reflects recurring water operations versus WCMA and rate-case true-ups, the stock-sale gain, and the anticipated Arizona property gain.
- Track drought conditions, customer usage, conservation rules, and the timing and recovery of regulatory balancing and memorandum accounts.
- Verify whether the $31 million TWA sale closes and whether its holdback is ultimately collected.
- Monitor capital spending, financing needs, debt levels, and regulatory approvals for planned utility investments.