SJW Corp. — FY 2013 Form 10-K
Filing identity: The supplied filing is for SJW Corp., not H2O America. It reports the fiscal year ended December 31, 2013; it is an annual filing, not a standalone fourth-quarter report. Amounts below are in U.S. dollars.
Business context
SJW is a holding company whose principal business is regulated water service in the San Jose, California area and central Texas. It also operates real estate businesses and is developing a Texas water-supply project. Water Utility Services served approximately 239,000 connections at year-end.
Financial performance and position
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $276.9 million | $261.5 million |
| Operating income | $53.4 million | $55.3 million |
| Net income | $22.4 million | $22.3 million |
| Diluted EPS | $1.12 | $1.18 |
| Cash from operations | $63.4 million | $74.4 million |
| Company-funded utility capital expenditures | $82.7 million | $101.5 million |
- Revenue increased 5.9%, while operating expenses rose 8.3%; operating income declined 3.4%. Net income was nearly unchanged, but diluted EPS fell 5.1%, partly reflecting the 2013 share offering.
- Operating margin was approximately 19.3%, versus 21.1% in 2012. Higher water production costs were a major factor: production expense rose $13.6 million, including higher groundwater extraction charges, purchased-water and energy costs.
- At year-end, cash was $2.3 million, current assets $39.7 million and current liabilities $59.2 million. The current ratio was approximately 0.67. SJW reported $64.6 million of unused credit lines within $90 million of facilities; the lines expire September 1, 2014.
- Long-term debt, including current portion, was $335.6 million; line-of-credit borrowings were $22.4 million. Consolidated funded debt was 51% of capitalization. Year-end shareholders’ equity was $321.2 million.
- Quarterly seasonality was evident. For Q4 2013, revenue was $67.3 million, operating income $11.4 million, net income $4.7 million and diluted EPS $0.23, compared with $62.4 million, $14.1 million, $5.9 million and $0.31, respectively, in Q4 2012.
Material changes and unusual items
- Water Utility Services revenue rose $14.1 million in 2013, driven by rate increases, higher customer consumption and recognized balancing-account amounts. Real Estate Services revenue increased $1.2 million, principally from Tennessee leasing.
- Water production expenses increased despite lower purchased-water volume, with materially higher groundwater extraction charges and unit costs. The 2013 water supply mix included 27.1 billion gallons purchased, 19.3 billion gallons groundwater and 2.5 billion gallons surface water.
- Cash from operations fell approximately $11.0 million, chiefly reflecting lower collections of previously billed receivables and taxes, and higher payments for purchased water and groundwater charges.
- SJW issued 1.421 million shares in 2013 and received $35.9 million net proceeds for debt repayment and capital programs. It also sold its Connecticut warehouse for $9.2 million, recording a $1.1 million pretax gain.
- CLWSC recorded an approximately $1.0 million customer refund liability and revenue reduction following a Texas rate decision. The TCEQ decision is under appeal.
Outlook, risks and contingencies
- Management projected approximately $88.6 million of 2014 company-funded utility capital expenditures and $527.1 million over five years, subject to regulatory approval. About $60.5 million remained for the Montevina treatment-plant upgrade; the approved project estimate was $62 million.
- The California general rate case remained pending; interim rates based on year-end 2012 rates were in effect, with differences tracked for later recovery or refund. Management expected a decision in Q2 2014. A separate CLWSC rate increase was being billed subject to TCEQ approval and potential refund.
- California experienced a record-dry year. The Santa Clara Valley Water District set a 20% 2014 water-use reduction target and recommended mandatory conservation measures. Management believed supplies would meet 2014 demand, but drought, conservation and a shift toward costlier water sources could pressure revenue and expenses.
- Key risks include regulatory delay or disallowance of cost recovery, water availability and quality, energy and purchased-water costs, capital funding and interest rates, aging infrastructure, pension assumptions, and real-estate vacancies or impairment. CLWSC’s long-term GBRA supply contracts are take-or-pay.
- Management reported no litigation expected to have a material effect and no impairment in 2013 or 2012. Environmental remediation work was ongoing at identified sites; management did not expect a material financial impact. The independent auditor gave unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Confirm the issuer: this document is SJW Corp.’s 2013 Form 10-K, not an H2O America filing.
- Track the California rate-case decision, interim-rate true-up and the treatment of balancing and memorandum account balances.
- Assess drought restrictions, actual conservation and water-supply mix against management’s 2014 supply expectations and the 20% reduction target.
- Review 2014 capital spending, Montevina project costs, credit-line renewal or refinancing, and the planned $50 million senior-note issuance.
- Monitor the Texas appeal and the final disposition of rates billed subject to refund, along with the implications of take-or-pay water commitments.
- Reconcile the reduction in cash from operations with working-capital movements and evaluate the dividend payout, which was 65% of 2013 net income.