Filing summary: SJW Corp. Form 10-Q, quarter ended June 30, 2014
Entity note: The request identifies H2O America, but the supplied filing is for SJW Corp. and its subsidiaries. The figures below summarize the filing as provided; confirm the intended registrant.
Business context and reporting period
SJW Corp. operates regulated water utilities in California and Texas, alongside nonregulated water-related activities and commercial real estate. This unaudited filing covers the three and six months ended June 30, 2014. Water sales are seasonal, so interim results may not represent full-year performance. Dollar amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $70.4 | $74.2 | $125.0 | $124.4 |
| Operating income | $12.1 | $16.9 | $18.2 | $22.7 |
| Net income | $6.8 | $7.4 | $7.8 | $8.8 |
| Diluted EPS | $0.34 | $0.37 | $0.38 | $0.45 |
| Operating margin | 17.2% | 22.8% | 14.5% | 18.3% |
| Net margin | 9.7% | 10.0% | 6.2% | 7.0% |
- Q2 revenue fell 5.2%; first-half revenue rose 0.5%. Q2 net income declined 8%, and first-half net income declined 11% year over year.
- First-half operating cash flow was $25.0, versus $27.0 a year earlier. Investing used $46.7, including $48.2 of company-funded utility-plant additions. Financing provided $25.4; cash ended the period at $6.0, up from $2.3 at year-end 2013.
- At June 30, cash was $6.0 and current assets were $47.0 versus current liabilities of $92.1. The company reported $52.0 drawn on its line of credit, $334.7 of long-term debt and $0.6 of current long-term debt. It reported $44.8 of unused short-term credit capacity and compliance with applicable covenants.
- Shareholders’ equity was $321.5. The quarterly dividend was $0.19 per share; a $0.1875-per-share dividend was declared July 30 for payment in September.
Material changes and unusual items
- Management attributed weaker earnings chiefly to drought-related lower water use and a shift from less costly surface water to groundwater, purchased water and higher-cost energy. Q2 water-utility revenue fell $4.5; the filing attributes an $8.0 reduction to consumption changes, partly offset by rate increases and other items.
- First-half water production expense rose $5.8, while administrative and general expense fell $2.6, largely reflecting prior-year Texas project costs and lower pension expense. Depreciation and amortization increased $1.4.
- Results included a $2.0 pretax gain on sale of California Water Service Group shares and a $0.3 pretax gain on sale of a Texas property. The company also recorded $0.9 of California enterprise-zone sales and use tax credits related to 2008–2012. The stock sale generated a $1.2 after-tax gain.
- The California Water Service Group holding was valued at $6.3 at quarter-end, down from $8.9 at year-end; 125,969 shares were sold during Q2, leaving 259,151 shares.
Outlook, risks and contingencies
- California was experiencing a record drought. The local wholesaler targeted 20% water-use reduction and reduced treated-water deliveries to 80% of monthly contract allocations through year-end. San Jose Water Company said its available potable sources should meet customer demand through the remainder of 2014. Regulated usage was down 16% in April and 9% in May versus the same months in 2013.
- Management budgeted $88.6 of 2014 Water Utility Services capital expenditures, excluding customer-funded work; $48.2, or 54%, had been spent by June 30. It projected approximately $527 of capital expenditures over five years, subject to regulatory approval, including $60.5 for the Montevina treatment plant.
- A CPUC proposed decision issued July 11 recommended lower rate increases than San Jose Water Company had requested; it was not final, and a final decision was expected in Q3 2014. A $9.4 revenue increase to offset wholesale water-cost increases took effect July 1. Drought conservation revenue and cost memorandum accounts are subject to recovery-recognition requirements.
- Texas utility rate increases were subject to potential adjustment or refund for some customers while proceedings continued. Management said a refund was not probable at the time and did not expect the final decision to materially affect the company.
- Other exposures include water-supply cost and availability, regulatory recovery and rate-case timing, variable-rate borrowing, pension assumptions and investment values, and equity-price changes. The filing reported no pending litigation expected to have a material effect and no material changes to previously disclosed risk factors.
- After quarter-end, the company expected to close a $50.0, 5.14% unsecured 30-year senior-note issuance on August 7. The filing also disclosed a July 30 amendment extending the CEO’s employment term through 2017 and providing for higher base salary and equity awards.
Investor facts to verify
- Confirm that SJW Corp., rather than H2O America, is the intended company for this summary.
- Check the final CPUC general-rate-case decision and the collection or refund treatment of interim rates and conservation memorandum accounts.
- Track drought conditions, conservation-driven demand, water-source mix and the resulting production costs.
- Assess funding needs and regulatory approval for the capital program, and monitor line-of-credit use and the planned senior-note issuance.
- Evaluate the Texas rate-case refund exposure and whether reported gains, tax credits and asset sales are recurring; they supported reported-period earnings.