Business context and reporting period
This is SJW Corp.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2015. SJW is a holding company with regulated water utility operations in California and Texas, non-tariffed water services, and real estate investments. The filing identifies the registrant as SJW Corp., not H2O America; confirm that this is the intended filing.
Amounts below are in millions of dollars unless stated otherwise. Water sales are seasonal, and interim results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue | $72.4 | $70.4 | $134.5 | $125.0 |
| Operating income | $17.2 | $12.1 | $30.0 | $18.2 |
| Net income | $7.5 | $6.8 | $12.2 | $7.8 |
| Diluted EPS | $0.36 | $0.34 | $0.59 | $0.38 |
| Operating margin | 23.8% | 17.2% | 22.3% | 14.5% |
| Net margin | 10.3% | 9.7% | 9.0% | 6.2% |
- Revenue rose 3% in Q2 and 8% year to date. Rate increases added $11.8 million in Q2 and $20.8 million year to date, partly offset by lower consumption, which reduced revenue by $9.3 million and $13.2 million, respectively.
- Operating expenses declined 5% in Q2 and 2% year to date. Lower water production costs more than offset higher administrative, depreciation, maintenance, and tax expenses. Administrative and general expense increased $2.0 million in Q2 and $3.8 million year to date, including pension, legal, rate-case, and customer communications costs.
- Year-to-date net income increased 57%; the comparison also reflects a $2.0 million gain on a stock sale in 2014 and $0.9 million of California tax credits recognized in Q2 2014. Interest on long-term debt increased, partly reflecting notes funded in August 2014.
- Operating cash flow was $45.0 million versus $25.0 million in the first half of 2014. Capital spending included $37.9 million of company-funded utility additions; net cash used in investing was $47.7 million. Dividends paid were $7.9 million.
- At June 30, cash was $5.2 million; current assets were $70.0 million and current liabilities $59.0 million. Long-term debt, including current portion, was approximately $384.6 million; line-of-credit borrowings were $20.2 million. Of $100 million in available credit facilities, $76.8 million was unused. The company reported compliance with debt covenants.
- Total assets were $1.296 billion and shareholders’ equity $364.7 million. The quarterly dividend was $0.20 per share; a $0.195 dividend was declared July 29 for payment September 1, 2015.
Material changes, outlook, and risks
- California drought rules and mandatory conservation materially reduced water consumption. Q2 water production was 24% lower year over year; surface-water use increased while groundwater use fell. Management said available sources were expected to meet customer demand through the remainder of 2015, but noted very low snowpack, constrained state and federal allocations, and groundwater-storage concerns if dry conditions and conservation targets persist.
- Stage 3 mandatory conservation measures and drought surcharges took effect June 15, 2015. Surcharges are tracked in a regulatory account intended to offset future revenue increases; recovery of conservation-related lost revenue and costs remains subject to regulatory review. A request to recover $9.6 million of drought-related under-collections was pending.
- A $18.4 million, approximately 6.44%, surcharge increase to recover higher purchased-water and groundwater costs was authorized effective July 1, 2015. The water district also raised those unit charges effective July 1.
- The 2016–2018 general rate-case request sought revenue increases of $34.9 million (12.22%), $10.0 million (3.11%), and $17.6 million (5.36%), respectively. The regulator’s ratepayer advocate recommended lower increases. A final decision was expected in the second half of 2015, with new rates targeted for early 2016; these are requests, not assured outcomes.
- Management budgeted $125.4 million in 2015 company-funded water-utility capital expenditures and projected approximately $662 million over five years, subject to regulatory approval. The five-year program includes $59.6 million for upgrades to the Montevina treatment plant.
- Key risks include drought and conservation-related demand declines, water supply and cost volatility, timing and outcomes of regulatory proceedings and recovery of regulatory-account balances, seasonal variation, and substantial infrastructure investment needs. Routine litigation was not expected to have a material effect. A California tax examination covering 2008–2012 refund claims was ongoing.
- No formal earnings guidance was provided. Management cautioned that forward-looking results are subject to risks and may differ materially from expectations.
Most important facts for investors to verify
- Confirm the issuer: the supplied filing is for SJW Corp., although the request names H2O America.
- Track California drought conditions, customer conservation, water availability, and the timing and recoverability of memorandum-account balances.
- Check final CPUC decisions on the general rate case, drought under-collection recovery, and other pending regulatory requests; distinguish requested rates from approved rates.
- Monitor capital spending, financing needs, debt and credit-facility availability, and the impact of higher water-purchase costs.
- Assess earnings comparisons against the prior-year stock-sale gain and tax credits, as well as the seasonal nature of water demand.