Business context and reporting period
The supplied filing is SJW Corp.’s unaudited Form 10-Q for the quarter ended March 31, 2016—not a filing identified as H2O America. SJW is a holding company whose businesses include regulated water utilities in California and Texas and commercial real estate. Amounts below are in thousands of dollars, except per-share data.
Water demand is seasonal, and first-quarter results are not necessarily indicative of full-year performance. California drought restrictions and conservation continued to affect water usage.
Key financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenue | $61,112 | $62,112 | Down $1,000 (1.6%) |
| Operating income | $10,581 | $12,805 | Down $2,224 |
| Operating margin | 17.3% | 20.6% | Down 3.3 percentage points |
| Net income | $3,378 | $4,695 | Down $1,317 (28%) |
| Net margin | 5.5% | 7.6% | Down 2.1 percentage points |
| Diluted EPS | $0.16 | $0.23 | Down $0.07 |
| Operating cash flow | $32,087 | $27,167 | Up $4,920 |
| Capital additions to utility plant, company-funded | $31,560 | $16,253 | Nearly doubled |
Operating expenses rose $1,224 to $50,531. Depreciation and amortization increased $1,024, while water production expenses fell $775 as reduced customer usage more than offset higher unit costs. Dividends were $0.20 per share in the quarter; the board later declared a quarterly dividend of $0.2025 per share, payable June 1, 2016.
Balance sheet, debt and liquidity
- At March 31, 2016, cash was $8,692, total current assets were $62,626 and current liabilities were $97,815, implying a working-capital deficit of approximately $35,189.
- Debt comprised $365,823 of long-term debt, $14,781 current portion and $39,500 drawn on lines of credit. The company reported $57,500 of unused short-term credit capacity; credit lines expire September 1, 2016.
- Consolidated funded debt was 50% of total capitalization; management reported compliance with applicable credit covenants. San Jose Water Company reported funded debt at 45% of capitalization and interest coverage of 433%.
- Shareholders’ equity was $384,199, compared with $383,783 at year-end 2015. Total assets were $1,355,576, up from $1,337,325.
- Operating cash flow was more than offset by investing outflows of $34,486, principally utility-plant spending. Financing provided $5,852, and cash increased $3,453 to $8,692.
Material changes and management commentary
- Management attributed the decline in earnings mainly to drought-related conservation and lower water usage. Water Utility Services’ consumption-related revenue decreased $6,456; this was partly offset by rate increases of $3,565 and $2,994 of WCMA revenue. The prior-year quarter included $1,876 from a 2012 general-rate-case rehearing, with no comparable 2016 amount.
- Water production volume fell 19% to 6,610 million gallons. The San Jose service area’s purchased-water price and groundwater extraction charge had risen approximately 17% and 20%, respectively, effective July 2015.
- Management said available water sources were expected to meet customer demand through the remainder of 2016. Reservoir and rainfall conditions had improved by early April, but the filing also described continued conservation restrictions and drought-related uncertainty.
- Water Utility Services’ 2016 company-funded capital-expenditure budget was $144,951; $31,600, or 22%, had been spent by quarter-end. Planned five-year capital expenditures were approximately $618,173, subject to regulatory approval.
Outlook, regulation, contingencies and unusual items
- No consolidated earnings or revenue guidance is provided. San Jose Water Company’s general rate case remained pending: interim rates were in effect from January 1, 2016, and a proposed CPUC decision issued April 22 was scheduled for a May 26 vote. Differences between interim and ultimately approved rates are tracked for recovery or refund.
- The CPUC approved recovery of $7,668 of 2015 WCMA under-collection on April 21, 2016, through a surcharge over 12 months. This was subsequent to quarter-end.
- On February 22, 2016, SJW agreed to sell Texas Water Alliance Limited to GBRA for $31,000 cash. The agreement requires closing conditions, including GBRA financing; $3,000 of the price is to be held back for four years, subject to possible reductions. The filing cautions that the sale may not close.
- Regulatory assets totaled $165,540, including $42,183 of balancing and memorandum accounts. The company reported an additional net under-collection of $1,288 not recorded in the financial statements, subject to future regulatory review and recovery risk.
- Management reported no pending litigation expected to have a material effect. Other risks include drought and conservation, rate-case timing, water-supply costs, interest rates, pension-asset values, and the uncertain TWA sale. The California Franchise Tax Board was examining refund claims for fiscal years 2008–2012.
Important facts for investors to verify
- Confirm the issuer: the source is SJW Corp., despite the request metadata naming H2O America.
- Track the final CPUC general-rate-case decision and the timing and collectability of regulatory-account balances.
- Monitor drought rules, conservation-related demand, supply mix, and purchased-water and groundwater costs.
- Verify whether the TWA sale closes, the cash proceeds received at closing, and the conditions on the deferred holdback.
- Assess funding for the substantial capital program, short-term credit-line maturity, and the effect of seasonal demand on full-year results.