SJW Corp. 10-Q Summary: Quarter Ended September 30, 2008
Business Context and Reporting Period
This filing is a Form 10-Q for SJW Corp., a holding company operating regulated water utilities (San Jose Water Company and Canyon Lake Water Service Company) and real estate investments (SJW Land Company). The report covers the quarterly period ended September 30, 2008, and the nine-month period ended on the same date. The company serves approximately 225,000 connections in the San Jose, California area and 8,700 connections in Canyon Lake, Texas.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2008 | 9 Months Ended Sep 30, 2008 |
|---|---|---|
| Operating Revenue | $69,507 | $170,818 |
| Operating Income | $11,465 | $26,767 |
| Net Income | $8,257 | $17,253 |
| Diluted EPS | $0.44 | $0.93 |
| Cash Flow from Operations | N/A | $35,561 |
| Long-Term Debt | $216,773 | $216,773 |
| Cash and Equivalents | $2,177 | $2,177 |
| Dividends Per Share | $0.16 | $0.48 |
Margins: Operating margin for the nine months ended September 30, 2008, was approximately 15.7% ($26,767 / $170,818). Net income margin was approximately 10.1%.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 7% year-over-year for both the quarter and the nine-month period. This was driven primarily by rate increases ($4,471 for the quarter; $10,412 for nine months) and consumption changes.
- Profitability: Net income increased 3% for the quarter ($8,257 vs. $8,011) and 11% for the nine months ($17,253 vs. $15,539).
- Expense Increases: Total operating expenses rose 7% for the quarter and 6% for the nine months. Water production costs increased due to higher per-unit costs for purchased water, groundwater extraction charges, and energy prices. These were partially offset by increased surface water supply and lower customer usage in the quarter.
- Comprehensive Income: Comprehensive income for the quarter was $11,975, significantly higher than net income due to a $3,718 gain from unrealized income on the investment in California Water Service Group.
Outlook, Risks, and Management Commentary
- Capital Expenditures: Budgeted capital expenditures for 2008 are $49,449. Year-to-date spending is approximately $51,000. Over the next five years, the company expects to incur approximately $263,311 in capital expenditures for pipe replacement and system maintenance.
- Water Supply and Drought: California is under a state-wide water emergency. While the company expects to receive full contract deliveries from the Santa Clara Valley Water District (SCVWD) in 2008, future supply is contingent on hydrologic conditions. Groundwater levels remain comparable to 30-year normal levels.
- Regulatory Affairs: The California Public Utilities Commission (CPUC) approved several rate increases in 2008 to offset rising costs for purchased water and groundwater extraction. A new two-tiered increasing block rate structure was implemented in November 2008.
- Liquidity and Debt: The company maintains a capital structure of approximately 50% debt and 50% equity. It has $35,000 in available lines of credit, with $16,100 unused as of September 30, 2008. Management notes that capital market turbulence could impact the cost and availability of new financing.
- Real Estate Transaction: The CPUC approved the sale of a San Jose Water Company office facility to Adobe Systems. The transaction is expected to finalize in the fourth quarter of 2008.
Investor Verification Checklist
- Rate Case Outcomes: Verify the final impact of the CPUC-approved rate increases and the new tiered rate structure on future revenue stability.
- Water Supply Costs: Monitor the volatility of purchased water and groundwater extraction charges, which are significant drivers of operating expenses.
- Capital Market Access: Assess the company's ability to refinance debt or raise new capital given the noted turbulence in capital markets.
- Real Estate Sale: Confirm the closing of the Adobe Systems property sale and the distribution of proceeds to customers via surcredits.
- Pension Fund Status: Review the funded status of the pension plan and potential increases in required contributions due to market fluctuations.