H2O AMERICA annual report, FY2015

Business context and reporting period

The supplied filing is SJW Corp.’s Form 10-K for the fiscal year ended December 31, 2015, filed February 25, 2016. It is an annual report, not a standalone Q4 filing, and identifies the registrant as SJW Corp., not H2O America. SJW provides regulated water service in California and Texas and operates a smaller real estate business.

Financial results and position

Amounts below are in millions of dollars unless otherwise noted.

• Revenue declined 4.6%; operating income fell 13.9% and net income fell 26.9% year over year. Operating margin was approximately 26.2%, versus 29.1% in 2014; net margin was approximately 12.4%, versus 16.2%.
• Operating expenses decreased 0.7% to $225.1 million. Production expenses fell to $110.6 million from $122.8 million, while administrative and general expense rose 16% to $47.1 million, including higher pension expense and legal fees.
• Operating cash flow increased to $97.3 million. Investing activities used $110.6 million; financing activities provided $16.2 million. Cash and equivalents were $5.2 million at year-end.
• Year-end total debt was $384.3 million, including current maturities; the company also had $34.6 million drawn on lines of credit. Unused short-term credit availability was $62.4 million, with facilities expiring September 1, 2016. Long-term debt was $380.8 million, and reported total capitalization was $764.6 million.
• Total assets were $1.341 billion and shareholders’ equity was $383.8 million. The company paid $15.9 million in dividends, or $0.78 per share.
• In Q4 2015, unaudited revenue was $87.6 million and net income was $16.2 million, versus $69.3 million and $5.7 million in Q4 2014. The prior-year comparison included substantial rate-case true-up revenue in Q3 2014.

Material changes versus the prior comparable period

• The principal driver of the annual revenue and earnings decline was the absence of $46.5 million in 2014 general-rate-case true-up revenue. Lower customer consumption, especially during California’s drought, also weighed on revenue.
• FY 2015 included $20.5 million of WCMA-related revenue for drought-driven lost sales, net of applicable reserves and offsets. The CPUC had approved $4.3 million of recovery for the April–December 2014 period; the company recognized $3.0 million net of a reserve.
• Higher water unit costs partly offset lower production volumes: purchased-water and groundwater-extraction charges increased, while greater use of available surface water and reduced usage lowered overall production costs.
• Cash from operations improved despite lower net income, principally reflecting the prior-year impact of general rate-case true-up accounting and changes in regulatory-account and working-capital balances.

Outlook, commentary, risks and unusual items

• Management expected water supplies to meet 2016 demand assuming existing restrictions and conservation continued, but warned that further conservation or rationing could be necessary if drought conditions persisted. Lower consumption can reduce revenue; recovery of drought-related amounts depends on regulatory approval and collection timing.
• A San Jose Water Company rate case requested increases of $34.9 million in 2016, $10.0 million in 2017 and $17.6 million in 2018. The regulator had authorized interim 2016 rates at year-end 2015, equal to year-end 2015 rates, pending a final decision expected in the first half of 2016. Any difference would be tracked for possible recovery or refund.
• Planned utility capital improvements were approximately $141.3 million for 2016 and $614.5 million over five years, subject to regulatory approval. The 2016 plan included about $43 million for pipe and main replacement and $24.5 million for the Montevina treatment plant. The company reported $46.9 million remaining in commitments for that plant upgrade.
• Key risks include regulatory rate and cost-recovery decisions, drought and water availability, higher purchased-water and energy costs, conservation-driven demand reductions, aging infrastructure, financing access and interest rates, pension costs, and environmental, water-quality, cyber-security and natural-disaster exposures. Management reported compliance with debt covenants and no pending litigation expected to have a material financial effect.
• Subsequent to year-end, SJW agreed to sell Texas Water Alliance to the Guadalupe-Blanco River Authority for $31.0 million cash. The agreement is conditional, including on the buyer completing financing; $3.0 million of the price is to be held back for four years, subject to possible reductions.
• The company reported effective disclosure controls and internal control over financial reporting; KPMG issued an unqualified audit opinion on the financial statements and internal controls.

Investor verification priorities

1. Confirm the correct issuer and reporting period: this source is SJW Corp.’s FY 2015 10-K, rather than an H2O America filing or a standalone Q4 report.
2. Review the final CPUC rate-case decision, including authorized increases and treatment of interim-rate differences and balancing or memorandum accounts.
3. Track drought conditions, customer usage, WCMA recovery and reserves, and the effects of water-supply mix and unit-cost changes.
4. Verify refinancing or renewal of the $100 million credit facilities before their September 2016 expiration, and monitor capital-spending funding and leverage.
5. Confirm whether the TWA sale closed, the cash proceeds received, and the terms or reductions applicable to the $3.0 million holdback.