Business context and reporting period
The filing is SJW Corp.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. Although the request identifies H2O America, the filing itself names SJW Corp.; confirm the issuer identity. SJW operates regulated water utilities in California and Texas, water-related businesses, and commercial real estate. Water sales are seasonal, so interim results may not indicate full-year performance.
Financial performance
Amounts below are in millions of dollars except per-share data. Third-quarter comparisons are year over year; nine-month comparisons are for the same period in 2012.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $85.2 | $82.4 | $209.6 | $199.1 |
| Operating income | $19.3 | $20.9 | $42.1 | $41.2 |
| Net income | $9.0 | $10.1 | $17.7 | $16.4 |
| Diluted EPS | $0.44 | $0.53 | $0.89 | $0.87 |
| Operating margin | 22.7% | 25.3% | 20.1% | 20.7% |
Revenue rose 3.5% in Q3 and 5.3% year to date. Q3 net income fell 11%, while nine-month net income increased 8%. Q3 operating costs rose $4.4 million, led by higher water production costs. Nine-month operating costs increased $9.6 million. Groundwater extraction charges and purchased-water costs were significant pressures; SCVWD raised unit prices by about 9% and 8%, respectively, effective July 2013. Nine-month revenue also benefited from rate increases and recognition of balancing and memorandum accounts.
Operating cash flow was $47.2 million for the nine months, down from $57.4 million. Investing used $66.5 million, including $59.5 million of company-funded utility-plant additions; financing provided $20.0 million, including $35.9 million of net equity-offering proceeds. Cash increased to $3.2 million. At September 30, long-term debt was $335.1 million, current long-term debt $0.6 million, and line-of-credit borrowings $7.0 million. The company reported $80.0 million of unused credit facilities. Current assets of $49.3 million were approximately equal to current liabilities of $49.7 million.
Material changes, outlook, and risks
- Q3 water utility revenue increased, but lower water consumption and increased groundwater use and charges weighed on results. Groundwater volumes rose while purchased-water volumes fell; surface water is generally less costly.
- Q3 2012 included a $0.9 million real-estate sale gain; 2013 recognized a $1.1 million gain on the February sale of a Connecticut warehouse. SJWTX’s rate decision also required an approximately $1.0 million customer refund, recorded as a reduction of revenue.
- San Jose Water’s general rate case remained undecided, with interim rates in effect and differences subject to later recovery or refund. The CPUC approved a $62 million Montevina treatment-plant upgrade settlement. SJWTX filed in October for a 23.1% rate increase, subject to protest, approval, and possible adjustment or refund.
- Management expected available water supplies to meet demand through the remainder of 2013. It cited potential California water-supply reductions associated with Delta smelt operating requirements, and noted that local surface-water availability affects costs. The filing provides no earnings guidance.
- Planned 2013 utility capital spending was $92.5 million, of which about $59.5 million had been spent by quarter-end. The company estimated approximately $553.5 million of utility capital expenditures over five years, subject to regulatory approval. Capital needs, rate-case timing, higher water-supply costs, weather and pension assumptions are key risks.
- The company reported no pending litigation expected to have a material effect, compliance with applicable debt covenants, and effective disclosure controls. Its 2013 expected pension and retiree-benefit contributions were up to $10.3 million; $3.0 million had been contributed through September.
Important facts for investors to verify
- Confirm that SJW Corp., rather than H2O America, is the intended filing issuer.
- Track the San Jose general rate case and SJWTX’s requested rate increase, including recovery or refund obligations.
- Assess whether water availability and higher groundwater and purchased-water costs affect margins and cash generation.
- Review funding and regulatory recovery for the announced capital program, including the Montevina project.
- Consider the effect of equity issuance and debt financing on per-share results, leverage, and liquidity.