SJW Corp. Form 10-K Summary
Filing identity and period: The supplied filing is SJW Corp.’s 10-K for the fiscal year ended December 31, 2014, not a filing identified as H2O America. It reports annual results; quarterly data below provides the fourth-quarter comparison.
Business context and reporting period
SJW Corp. is a holding company whose main business is regulated water service through San Jose Water Company in California and Canyon Lake Water Service Company in Texas. It also has commercial real estate operations and a Texas water-supply development subsidiary. The California utility serves about 229,000 connections; the Texas utility serves about 12,000.
Financial results and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $319.7 million | $276.9 million |
| Operating income | $92.9 million | $53.4 million |
| Net income | $51.8 million | $22.4 million |
| Diluted earnings per share | $2.54 | $1.12 |
| Cash from operations | $65.9 million | $63.4 million |
- Reported revenue grew 15.5%, operating income 73.9%, and net income 131%. The company recorded $46.5 million of 2012 general rate-case true-up revenue in 2014; excluding that item, revenue was approximately $273.2 million, below 2013.
- Reported operating margin was 29.1%, versus 19.3% in 2013; net margin was 16.2%, versus 8.1%. The true-up materially boosts comparability.
- Fourth-quarter revenue was $69.3 million versus $67.3 million; operating income was $15.6 million versus $11.4 million; net income was $5.7 million versus $4.7 million; diluted EPS was $0.28 versus $0.23.
- Company-funded capital expenditures were $91.8 million, exceeding operating cash flow. Cash and equivalents were $2.4 million at year-end. The company reported $83.8 million of unused credit capacity and $13.2 million drawn on its lines of credit.
- Total debt was approximately $384.9 million of long-term debt plus $13.2 million of line borrowings. Consolidated funded debt was 52% of total capitalization; the company reported compliance with its debt covenants. Shareholders’ equity was $360.2 million.
- Dividends paid were $15.2 million, or $0.75 per share. The annual dividend had increased for 47 consecutive years.
Material changes versus the prior year
- Water Utility Services revenue rose primarily due to the $46.5 million rate-case true-up and authorized rate increases, partly offset by lower consumption and lower revenue recognized in balancing and memorandum accounts.
- Water production fell 10.1% to 44.6 billion gallons. California residential usage declined 14.9% and business usage 5.9%; drought restrictions and conservation contributed to lower demand.
- Purchased-water costs declined, but groundwater extraction charges and power costs increased. Use of less-costly surface water also fell in drought conditions.
- Operating income and earnings also benefited from a $2.0 million pretax gain on the sale of California Water Service Group shares and a lower effective tax rate (33%, versus 39%).
- Year-end regulatory assets increased to $174.9 million from $83.5 million, including significant postretirement-benefit and rate-related balances.
Outlook, risks, contingencies, and unusual items
- Management expected available supplies to meet 2015 demand but cautioned that continued drought could require further conservation or water rationing. The SCVWD’s treated-water delivery reduction was extended through June 30, 2015.
- Planned 2015 capital expenditures were $133.5 million; management projected approximately $662 million over five years, subject to regulatory approval. Main replacements and Montevina Water Treatment Plant upgrades are major projects.
- The CPUC approved a 2.94% California step-rate increase effective January 1, 2015. A new California rate case requested increases for 2016–2018; those requests were pending. Texas rate increases were approved to phase in annually from 2015 through 2018.
- Collection of the $46.7 million California rate-case surcharge is spread over three years and depends on customer usage. The filing also reports an unrecorded net under-collection of $8.3 million in balancing and memorandum accounts, mostly related to conservation accounts.
- Other key exposures include regulatory recovery delays, drought and water-supply costs, required capital investment, interest-rate and financing risk, pension funding, and aging infrastructure. The pension obligation increased partly due to updated mortality assumptions.
- No pending litigation was expected to have a material effect. The auditor gave an unqualified opinion and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- How much of 2014’s earnings increase is attributable to the nonrecurring $46.5 million rate-case true-up, and how the surcharge is being collected.
- Whether drought-related lower usage and higher-cost water sourcing continue, and whether the utility can recover associated costs through rates.
- Regulatory outcomes for the California 2016–2018 rate request, revenue-decoupling proposal, and Texas rate increases.
- Funding, timing, and regulatory approval for the planned capital program, alongside debt levels and available credit.
- Future pension contributions and the recoverability of the substantial regulatory asset balance.