Filing overview
Entity mismatch: The supplied filing is SJW Corp. and subsidiaries’ Form 10-Q, not a filing for H2O America. It covers the quarter and six months ended June 30, 2011; dollar amounts below are in millions unless stated otherwise.
SJW is a holding company with regulated and nonregulated water utility operations in California and Texas, plus commercial real estate investments. Water sales are seasonal, and the company cautions that interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $59.0 | $54.1 | $102.7 | $94.5 |
| Operating income | $13.8 | $11.3 | $19.4 | $16.7 |
| Net income | $5.5 | $4.5 | $6.1 | $5.5 |
| Diluted EPS | $0.29 | $0.24 | $0.32 | $0.29 |
| Operating margin | 23.4% | 21.0% | 18.9% | 17.6% |
- Q2 revenue rose 9%; net income rose about 21%. For the first half, revenue increased 9% and net income about 10%.
- Management attributed revenue growth to higher consumption, rate increases, new customers, and increased real estate revenue. For the six-month period, water utility revenue was $100.5 million versus $92.9 million.
- Operating expenses increased 6% in Q2 and 7% for the first half. Higher administrative and general costs, depreciation, and maintenance more than offset some production-cost benefits. First-half effective tax rate was 41.22%, compared with 40.75%.
- Cash from operations was $29.7 million for the first half, up from $22.2 million. Investing used $33.6 million, including $28.3 million of company-funded utility plant additions; financing provided $47.6 million. Ending cash was $45.4 million, versus $1.7 million at year-end 2010.
- At June 30, total long-term debt including current maturities was $345.9 million, and line-of-credit borrowings were $6.8 million. Shareholders’ equity was $255.1 million. Cash less these borrowings implies net debt of about $307.4 million. The reported current assets were $83.8 million and current liabilities $39.4 million.
- Dividends were $0.17 per share in Q2 and $0.34 for the first half. On July 27, the board declared a quarterly dividend of $0.1725 per share, payable September 1.
Changes, outlook, and risks
- On June 30, SJW issued $50 million of unsecured 4.35% senior notes due 2021. The proceeds contributed to the increase in cash and long-term debt. Credit-line terms were amended July 1: SJW Corp./SJW Land’s maximum facility declined from $45 million to $10 million, while San Jose Water Company’s increased from $50 million to $75 million.
- Management said water supplies were expected to meet customer demand through the rest of 2011. Reservoir storage and rainfall were above stated benchmarks, but water supply availability, weather, and customer consumption remain important drivers.
- Planned 2011 Water Utility Services capital expenditures were $70.0 million, with 40% spent by June 30; expected expenditures over five years were approximately $469 million. The Montevina treatment-plant upgrade was estimated at $73.7 million over five years, subject to regulatory approval.
- Regulatory matters include a pending request to recover $5.74 million of conservation-related under-collections, with a resolution expected in Q3 2011; the company’s cost-of-capital application, with a decision expected by year-end; and a Texas rate case, where interim 38% increases were subject to refund and a decision was expected in early 2012. A $9.1 million California rate increase took effect July 1, 2011.
- California water supply could be affected by federal Delta smelt and longfin smelt restrictions. Management described potential State Water Project/Central Valley Project supply reductions under scenarios, including 17%–18% in a “most likely” scenario and 32%–33% in a “worst case” scenario for supplies to the regional water district.
- Balancing and memorandum accounts had net under-collections of $3.0 million and $5.6 million, respectively, at June 30. Recovery depends on CPUC approval; the conservation-recovery request had faced rejection without prejudice.
- The company reported no pending litigation expected to have a material financial effect. In a property-encroachment case, a court ordered removal of a water main but found no damages; the parties waived appeal rights.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It identified no material sensitivity to market rates and prices, while noting exposure to interest rates, pension-asset values, and equity prices.
Important facts to verify
- Confirm the intended issuer: the filing is for SJW Corp., not H2O America.
- Track CPUC decisions on conservation-account recovery, the Montevina project, cost of capital, and bonus-depreciation rate-base effects; verify timing and recoverability assumptions.
- Monitor Texas rate-case outcomes and potential refunds of interim rate increases.
- Compare actual capital spending and funding needs with the stated $70.0 million 2011 budget and $469 million five-year plan, including debt and credit-line capacity after the July amendments.
- Assess seasonality, water-supply restrictions, and changes in purchased-water mix and costs when interpreting interim earnings.