SJW Corp. Form 10-Q — quarter ended September 30, 2015
Issuer identification: The supplied filing is for SJW Corp., a California water utility holding company, not an issuer named H2O America. Verify that this is the intended filing. Amounts below are in thousands of dollars except per-share data.
Business context and reporting period
SJW provides regulated and non-tariffed water services in California and Texas and operates a real estate segment. San Jose Water Company serves approximately 229,000 connections in the San Jose area; its Texas utility serves approximately 12,000 connections. The filing covers the three and nine months ended September 30, 2015. Water demand and revenue are seasonal, generally peaking in warm, dry months.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $82,955 | $125,430 | $217,469 | $250,382 |
| Operating income | $18,260 | $59,114 | $48,275 | $77,289 |
| Net income | $9,534 | $38,366 | $21,690 | $46,118 |
| Diluted EPS | $0.46 | $1.88 | $1.06 | $2.26 |
| Operating margin | 22.0% | 47.1% | 22.2% | 30.9% |
| Net margin | 11.5% | 30.6% | 10.0% | 18.4% |
For the nine months, operating cash flow was $72,344 versus $45,901; investing cash outflow was $74,308 versus $72,405; and financing cash inflow was $5,836 versus $29,804. Cash at September 30 was $6,271.
At September 30, total assets were $1,323,375, shareholders’ equity $371,022, long-term debt including current portion approximately $384,514, and line-of-credit borrowings $21,200. Available unused credit lines were $75,800; total facilities were $100,000. The company reported compliance with its debt covenants. Dividends were $0.20 per share for Q3 and $0.59 for the nine months.
Changes versus prior comparable periods
- Revenue declined 34% in Q3 and 13% year to date; net income declined 75% and 53%, respectively. The principal comparison factor was $46,456 of 2012 General Rate Case true-up revenue recognized in Q3 2014. The 2014 true-up surcharge was approved for collection over three years.
- Lower customer consumption reduced water utility revenue by $15,264 in Q3 and $28,436 year to date. Rate increases and balancing-account activity partly offset the decline.
- Water production expense fell 6% in Q3 and 7% year to date, mainly from lower usage, partly offset by higher unit costs. Purchased-water prices rose about 17% and groundwater extraction charges about 20% in July 2015.
- Administrative and general expense increased, including higher pension, rate-case, legal and customer-communication costs. Depreciation also increased with utility-plant additions.
- Q3 2015 included a $1,886 pretax gain on the sale of nonutility properties. Year-to-date 2014 included a $2,017 gain on sale of California Water Service Group stock.
Outlook, risks and other notable items
- Drought and conservation: California conservation rules included mandatory usage reductions and drought surcharges effective June 15, 2015. Surcharges are recorded as a regulatory liability, not revenue; the balance was $6,413 at September 30. Management said available water sources were expected to meet demand through the remainder of 2015. Reservoir storage, rainfall and groundwater conditions remained stressed.
- Revenue recovery and rates: A California general rate case sought increases of 12.22% in 2016, 3.11% in 2017 and 5.36% in 2018; the ratepayer advocate recommended lower increases. A decision was expected in Q4 2015, with new rates expected in 2016; interim rates could be requested if delayed. Recovery of drought-related memorandum-account balances requires regulatory review, and the filing notes no assurance all amounts will be recovered. A net $22,227 of balancing and memorandum account amounts had not been recorded in the financial statements.
- Capital needs: The 2015 water utility capital budget was $108,000, with $63,100 spent by September 30. Projected five-year capital expenditures were approximately $662,000, subject to regulatory approval, including $59,600 for the Montevina treatment plant upgrade.
- Funding and contingencies: The company sought CPUC authority to issue up to $150,000 of additional debt and equity securities. Routine litigation was not expected to have a material effect. SJW Corp. was undergoing a California tax examination related to refund claims for 2008–2012. Management reported effective disclosure controls and no material change in internal control.
- Dividend: On October 28, 2015, the board declared a quarterly dividend of $0.195 per share, payable December 1, 2015.
- No specific earnings or revenue guidance was provided. Management cautioned that results are affected by seasonality, conservation, weather, regulatory decisions, water costs, interest rates and pension-asset values.
Investor verification priorities
- Confirm the issuer and ticker: this filing identifies SJW Corp., not H2O America.
- Separate underlying operating trends from the prior-year $46,456 rate-case true-up and assess the sustainability of current revenue and margins under conservation conditions.
- Check outcomes of the general rate case, drought-account recovery request and other regulatory proceedings, including whether unrecorded balances are approved for recovery.
- Monitor drought conditions, customer demand, purchased-water and groundwater costs, and the company’s ability to meet demand.
- Assess planned capital spending against operating cash flow, borrowing capacity, debt levels and dividend commitments.