SJW Corp. 10-Q Filing Summary
Business Context and Reporting Period
Company: SJW Corp. (Parent of H2O America/San Jose Water Company, Canyon Lake Water Service, Texas Water Alliance, and SJW Land Company).
Reporting Period: Quarter and nine months ended September 30, 2010.
Business Overview: A holding company operating regulated and non-regulated water utilities in California and Texas, alongside real estate investment activities. Operations are seasonal, with higher revenue typically occurring in warm, dry summer months.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2010 | 9 Months Ended Sep 30, 2010 |
|---|---|---|
| Operating Revenue | $70,347 | $164,886 |
| Operating Income | $12,420 | $25,319 |
| Net Income | $10,787 | $16,288 |
| Earnings Per Share (Diluted) | $0.58 | $0.87 |
| Operating Cash Flow (9 Months) | $33,172 | |
| Capital Expenditures (9 Months) | ~$73,332 (80% of $91.5M forecast) | |
| Long-Term Debt | $295,990 (excluding current portion) | |
| Cash and Equivalents | $3,335 |
Material Changes vs. Prior Period
- Net Income Growth: Net income increased 35% ($2.77M) for the quarter and 30% ($3.74M) for the nine months compared to 2009. This was primarily driven by a one-time net gain of $2.635M from the sale of California Water Service Group stock and lower production costs due to increased surface water availability.
- Revenue Trends: Operating revenue increased 1.5% for the quarter but decreased 1.6% for the nine months. The nine-month decline was due to a 4% drop in water consumption (conservation efforts) partially offset by a 2% increase from rate hikes.
- Production Costs: Water production costs decreased 5% for the nine months, attributed to higher surface water usage (cheaper than groundwater/purchased water) and conservation reducing total volume.
- Capital Structure: Long-term debt increased significantly due to the issuance of $50M in California Pollution Control Financing Authority Revenue Bonds in June 2010 to fund system improvements.
Outlook, Risks, and Management Commentary
- Regulatory Proceedings:
- Cost of Capital: A CPUC decision on a requested 9.70% return on rate base is expected in Q4 2010.
- Rate Recovery: A request to recover $5.74M in Mandatory Conservation Revenue Adjustment Memorandum Account (MCRAM) balances is pending CPUC approval, expected in Q4 2010.
- Montevina Treatment Plant: A $73.7M upgrade project is proposed, with funding requests for 2011-2015.
- Texas Rate Case: Canyon Lake Water Service filed for a 38.4% revenue increase with the Texas Commission on Environmental Quality; resolution expected in 12+ months.
- Water Supply Risks: Operations are sensitive to drought and regulatory restrictions on State Water Project (SWP) and Central Valley Project (CVP) supplies due to Delta smelt protections. Mandatory conservation was recently lifted but voluntary conservation remains requested.
- Capital Expenditures: The company expects to incur approximately $439M in capital expenditures over the next five years for pipe replacement and system maintenance.
- Dividends: A quarterly dividend of $0.17 per share was declared on October 27, 2010.
Investor Verification Checklist
- Regulatory Approvals: Monitor Q4 2010 CPUC decisions regarding the Cost of Capital application and the MCRAM revenue recovery request.
- Water Supply Constraints: Track rainfall data and potential new restrictions on SWP/CVP supplies that could force a shift to more expensive groundwater or purchased water.
- Capital Expenditure Execution: Verify the pace of spending against the $91.5M 2010 budget and the long-term $439M five-year plan.
- Debt Covenants: Confirm continued compliance with debt covenants (funded debt < 66.67% of capitalization; interest coverage > 225%).
- Investment Portfolio: Review the remaining balance and fair value of the California Water Service Group investment ($32.4M as of Sep 30, 2010).