SJW Corp. Form 10-Q Summary — Quarter Ended September 30, 2014
Filing identity: The supplied filing is for SJW Corp. and subsidiaries, not H2O America. Figures are in thousands of dollars except per-share data and where noted.
Business context and reporting period
SJW is a holding company with regulated water utility operations primarily in California and Texas, plus nonregulated water-related activities and commercial real estate. The report covers the third quarter and first nine months of 2014. Water demand is seasonal; results for interim periods are not necessarily indicative of full-year performance.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $125.4 million | $85.2 million | $250.4 million | $209.6 million |
| Operating income | $59.1 million | $19.3 million | $77.3 million | $42.1 million |
| Net income | $38.4 million | $9.0 million | $46.1 million | $17.7 million |
| Diluted EPS | $1.88 | $0.44 | $2.26 | $0.89 |
| Operating margin | 47.1% | 22.7% | 30.9% | 20.1% |
For the nine months, operating cash flow was $45.9 million, versus $47.2 million a year earlier. Investing used $72.4 million, including $70.3 million of company-funded utility plant additions; financing provided $29.8 million. Cash increased to $5.6 million from $2.3 million at year-end 2013.
At September 30, total assets were $1.21 billion and shareholders’ equity was $356.6 million. Long-term debt, including current maturities, totaled $385.1 million; the line of credit had $8.2 million outstanding. The company reported $88.8 million of unused short-term credit capacity and compliance with applicable covenants. SJW’s consolidated funded debt was 52% of total capitalization; San Jose Water Company’s was 47%. The quarterly dividend was $0.19 per share, compared with $0.18 a year earlier.
Material changes versus prior periods
- Reported revenue and earnings rose sharply, primarily because SJW recognized $46.456 million of 2012 General Rate Case true-up revenue in Q3. The CPUC authorized recovery of approximately $46.7 million through a surcharge over three years, beginning October 2, 2014; revenue recognition should not be confused with cash already collected.
- Excluding that true-up, underlying reported revenue factors included rate increases and new customers, offset by lower consumption and reductions in other balancing and memorandum account revenue. Nine-month water utility revenue also reflected a $943,000 Texas rate-case refund in the comparable-period analysis.
- Nine-month operating expenses increased $5.5 million. Higher depreciation, maintenance, water supply unit costs and reduced surface-water availability were partly offset by lower administrative and general expense.
- Operating cash flow was slightly lower despite higher net income, principally due to the $43.3 million cash-flow impact reported for regulatory assets related to balancing and memorandum accounts.
Outlook, risks and unusual items
- Drought and conservation: California remained in a record drought. The wholesaler targeted a 20% reduction in water use, and San Jose Water Company had mandatory conservation measures in effect. Regulated water production was down 11%, 13% and 14% year over year in July, August and September. Management said available water sources should meet demand through the remainder of 2014, while noting that local surface water is a lower-cost supply.
- Rates and regulatory recovery: The CPUC’s 2013–2015 rate-case decision authorized revenue increases, including 5.21% for 2014, and allowed the three-year true-up surcharge. SJW filed for rehearing on limited issues; the filing said this would not affect implementation of the authorized rates. The company also tracked conservation-related revenue shortfalls and costs in memorandum accounts, subject to recovery criteria.
- Texas rate case: CLWSC’s requested average 23.1% increase was in effect for most customers but remained subject to regulatory adjustment and possible refund. Management said a refund was not then considered probable and did not expect the final decision to materially affect SJW.
- Tax and other unusual items: New tangible-property tax regulations and related accounting-method changes reduced state income tax expense by $5.652 million in Q3 and the nine-month period; the company also recorded $880,000 of California tax credits for 2008–2012. Nine-month results included a $2.017 million pretax gain on sale of California Water Service Group shares. Q3 included a $281,000 pretax gain on a property sale.
- Capital and funding: SJW spent 79% of its $88.6 million 2014 company-funded capital expenditure budget through September. It estimated approximately $527 million of utility capital expenditures over five years, subject to regulatory approval. A $50 million, 5.14% unsecured senior note closed in August, with a 30-year maturity.
- Management reported no pending litigation expected to have a material effect and no material changes to previously disclosed risk factors. It provided no specific full-year earnings guidance in the supplied filing text.
Important facts for investors to verify
- How much of the $46.456 million rate-case true-up will convert to cash, and on what schedule; distinguish the recognized amount from surcharge collections.
- Whether drought restrictions, customer conservation and reduced surface-water availability continue to affect volumes, supply mix, and production costs.
- The final Texas rate-case outcome and any potential refunds, as well as the outcome of SJW’s limited CPUC rehearing request.
- Actual capital spending and funding needs relative to the stated 2014 budget and five-year investment estimate.
- The recurrence and timing of tax benefits and asset-sale gains when assessing earnings quality and future-period comparability.