Filing summary
Entity and period: The supplied filing is SJW Corp.’s Form 10-Q for the quarter ended March 31, 2015, not a filing identified as H2O America. Figures below are SJW Corp. consolidated amounts; dollar figures are in thousands except per-share data.
Business context and reporting period
SJW Corp. operates water utility businesses in California and Texas, alongside commercial real estate operations. Its California utility serves approximately 229,000 connections; its Texas utility serves approximately 12,000. Water sales are seasonal, with typically higher usage in warm, dry months, so first-quarter results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $62,112 | $54,596 | +13.8% |
| Operating income | $12,805 | $6,054 | +111.5% |
| Operating margin | 20.6% | 11.1% | +9.5 percentage points |
| Net income | $4,695 | $906 | +$3,789 |
| Net margin | 7.6% | 1.7% | +5.9 percentage points |
| Diluted EPS | $0.23 | $0.04 | +$0.19 |
| Dividend per share | $0.20 | $0.19 | +$0.01 |
Revenue growth reflected $8,975 of rate increases and $1,978 from balancing and memorandum accounts, partly offset by a $3,846 decline from consumption changes. The company recorded a $1,876 rate-case true-up. Operating expenses rose 1.6% overall: lower water production costs were more than offset by higher administrative and general costs, depreciation, and taxes. Interest on long-term debt increased $797, primarily due to a note funded in August 2014.
- Cash flow: Operating activities provided $27,167, compared with $15,740 a year earlier. Investing activities used $21,468, including $16,253 of company-funded utility-plant additions. Financing activities used $2,681; cash increased $3,018 to $5,417.
- Liquidity and debt: Current assets were $63,148 and current liabilities $48,652 (current ratio approximately 1.30). Long-term debt, including current portion, was $384,802; line-of-credit borrowings were $11,700. The company reported $85,300 of unused short-term credit capacity and compliance with stated debt covenants.
- Capital and obligations: Shareholders’ equity was $361,455. The 2015 utility capital-expenditure budget was $125,400, with approximately $662,000 projected over five years, subject to regulatory approvals. Expected 2015 pension and social-welfare-plan contributions were up to $8,077; none had been made by quarter-end.
Material changes and outlook
- Management attributed the substantial earnings increase to rate increases, the $1,876 true-up, and reduced groundwater extraction and power costs associated with conservation and a greater use of surface water.
- San Jose Water Company requested rate increases of $34,928 (12.22%) for 2016, $9,954 (3.11%) for 2017, and $17,567 (5.36%) for 2018. A CPUC decision was expected in the second half of 2015, with new rates intended to take effect in 2016.
- The company sought approval to recover a $9,567 drought-related conservation revenue under-collection through a 12-month surcharge; approval and timing were not assured. Separately, $8,115 of net under-collections in balancing and memorandum accounts had not been recorded in the financial statements at March 31, 2015.
- Management stated that available water sources were expected to meet customer demand through the remainder of 2015. However, severe California drought conditions prompted expanded mandatory conservation rules, a 30% local conservation target, and a statewide 25% urban water-use reduction order. Reduced consumption may lower revenue, and recovery of recorded conservation-related amounts depends on regulatory review and approval.
- The company reported no pending litigation expected to have a material effect. It disclosed an ongoing California tax examination for 2008–2012 refund claims. A quarterly dividend of $0.195 per share was declared April 29, 2015, payable June 1, 2015.
Important facts for investors to verify
- Confirm the issuer: this source is SJW Corp., not H2O America.
- Assess how much of the earnings improvement is recurring versus attributable to the $1,876 true-up and regulatory rate changes.
- Track drought restrictions, customer conservation, water availability, and the timing and approval of the requested $9,567 surcharge and other account recoveries.
- Review the outcome of the 2016–2018 rate case and the funding requirements for the capital program, including the Montevina treatment-plant upgrades.
- Monitor debt, variable-rate credit exposure, pension costs, and the stated multi-year capital-spending projections.