Filing summary
Issuer and period: The supplied filing is SJW Corp.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2011—not a filing identified as H2O America. SJW is a holding company whose businesses include regulated water utilities, related services, and commercial real estate.
Key financial results
Dollar amounts are in millions, except per-share data. Comparisons are with the corresponding 2010 period.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $73.9 | $70.3 | $176.6 | $164.9 |
| Operating income | $18.5 | $17.9 | $37.9 | $34.6 |
| Net income | $8.2 | $10.8 | $14.3 | $16.3 |
| Diluted EPS | $0.44 | $0.58 | $0.76 | $0.87 |
| Operating margin | 25.0% | 25.5% | 21.4% | 21.0% |
- Revenue rose 5% in Q3 and 7% year to date. Rate increases contributed $4.4 million and $8.9 million, respectively; water-utility consumption changes were a $1.4 million Q3 headwind and a $1.4 million year-to-date benefit.
- Operating income increased $0.6 million in Q3 and $3.3 million year to date, but net income declined 24% and 12%, respectively. The main year-over-year earnings headwind was the absence of a $4.5 million pretax gain from selling California Water Service Group shares in 2010; higher interest expense also weighed on results.
- Operating expenses increased 6% in Q3 and 7% year to date. Higher purchased-water and groundwater costs, depreciation, maintenance, taxes, and—in the year-to-date period—administrative costs were key increases. Q3 water production costs also benefited from lower usage and greater use of surface water.
- Cash from operations was $49.0 million versus $33.2 million year to date. Investing used $52.5 million, including $43.3 million of company-funded utility-plant additions; financing provided $44.8 million. Cash increased to $43.1 million from $1.7 million at year-end 2010.
- At September 30, cash was $43.1 million, current assets $89.2 million, and current liabilities $38.7 million. Long-term debt, including its current portion, was $345.7 million; line-of-credit borrowings were $5.5 million. Shareholders’ equity was $260.4 million.
- Dividends were $0.17 per share for Q3. After quarter-end, the board declared a $0.1725-per-share dividend, payable December 1, 2011.
Outlook, regulatory matters, and risks
- The company states that water sales are seasonal and weather-dependent, so interim results are not indicative of full-year results. Management believed water supplies would be sufficient for the remainder of 2011; however, availability of lower-cost local surface water and potential restrictions on imported supplies could affect costs and operations.
- Water Utility Services budgeted $63.0 million of company-funded capital expenditures for 2011, with $43.3 million spent through September. It expected approximately $469 million of capital expenditures over five years. A Montevina treatment-plant upgrade was estimated at $73.7 million over five years, subject to regulatory proceedings.
- Key pending CPUC matters included recovery of $5.7 million in conservation-related under-collections, a cost-of-capital proceeding, and the treatment of tax-related rate-base effects. A draft resolution supporting the conservation recovery was scheduled for a November 2011 vote. The Texas utility’s rate case remained pending; requested increases were subject to regulatory review and possible refund.
- Management reported compliance with applicable debt covenants and $76.5 million of unused short-term credit capacity. The company issued $50 million of 4.35% unsecured senior notes due 2021. Its California utility reported funded debt at 53% of capitalization, above its stated approximate 48% debt target.
- The filing describes ordinary-course litigation but no pending legal proceedings expected to have a material effect. The IRS notified the company it would audit fiscal years 2008 and 2009. Management reported effective disclosure controls and no material change in internal controls during the quarter.
Important facts for investors to verify
- Confirm issuer identity: the filing is for SJW Corp., despite the request metadata naming H2O America.
- Track CPUC and Texas regulatory decisions, including conservation-account recovery, cost of capital, treatment-plant investment, and Texas rates.
- Assess the sustainability of earnings growth against seasonal demand, water-supply mix and costs, and the absence of the prior-year stock-sale gain.
- Monitor planned capital spending, debt levels, borrowing capacity, and covenant compliance, as well as the outcomes of the IRS audit.