Filing summary
Important identity note: The supplied filing is SJW Corp.’s Form 10-Q, not a filing identified as H2O America. It covers the quarter and nine months ended September 30, 2012.
Business context and reporting period
SJW Corp. is a holding company whose businesses include regulated water utilities in California and Texas, water-related services, and commercial real estate. Water sales are seasonal; summer usage typically boosts revenue, so interim results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $82.4m | $73.9m | $199.1m | $176.6m |
| Operating income | $20.9m | $18.5m | $41.2m | $37.9m |
| Net income | $10.1m | $8.2m | $16.4m | $14.3m |
| Diluted EPS | $0.53 | $0.44 | $0.87 | $0.76 |
| Dividends per share | $0.18 | $0.17 | $0.53 | $0.52 |
Q3 operating margin was approximately 25.3% versus 25.0%; nine-month operating margin was approximately 20.7% versus 21.4%. Net margins were approximately 12.2% and 11.1% for Q3, and 8.2% and 8.1% for the nine-month periods, respectively.
For the first nine months, operating cash flow was $57.4m, compared with $49.0m a year earlier. Investing activities used $69.2m, including $67.7m of company-funded utility-plant additions; financing activities used $8.2m. Cash declined to $6.7m from $26.7m at year-end 2011. Book debt, including current maturities, was approximately $341.2m, down from $344.7m at year-end. The company reported $87m of unused short-term credit capacity and stated it was in compliance with its debt covenants.
At September 30, total assets were $1.075bn, shareholders’ equity was $271.7m, and current liabilities were $50.9m. The filing reports long-term debt fair value of approximately $456.5m, compared with book value of $341.2m.
Material changes versus the prior comparable period
- Q3 revenue increased 11% and net income increased approximately 23%; nine-month revenue rose 13% and net income rose 15%.
- Water Utility Services revenue growth reflected rate increases and higher consumption. Rate increases contributed $6.3m of Q3 growth and $13.6m for the nine-month period; consumption contributed $1.8m and $7.6m, respectively.
- Higher production costs partly offset revenue growth. Nine-month production costs rose $14.4m, mainly due to greater purchased-water volumes, increased unit prices and less available low-cost surface water. SCVWD raised purchased-water prices about 8% and groundwater extraction charges about 9% effective July 2012.
- Q3 results included a $0.9m pretax gain on the sale of the Florida warehouse. The company reclassified a Connecticut warehouse as held for sale; it reported no impairment.
Outlook, risks and contingencies
- Management said water supplies were expected to meet customer demand through the remainder of 2012. However, the Delta smelt biological opinion could reduce water supplies to SCVWD by an estimated 17%–18% under a most-likely scenario, or 32%–33% under a worst-case scenario; additional longfin smelt restrictions could further affect supply.
- Management budgeted $99.8m of 2012 Water Utility Services capital expenditures, of which about 68% had been spent by September 30. It expects approximately $579m of utility capital expenditures over five years, subject to regulatory approval. A separate Montevina treatment-plant upgrade is estimated at about $73.7m, with a decision expected in 2013.
- Pending California rate matters include a general rate case seeking increases for 2013–2015 and a treatment-plant upgrade application. The California general rate case decision was expected in Q4 2012, with rates targeted for January 2013; interim rate relief had been requested. A Texas rate-base determination remained pending, with a decision expected in Q1 2013; the existing 38% Texas rate increase was subject to adjustment or refund.
- Management anticipated 2013 increases in union salaries, healthcare costs, depreciation and property taxes. The company was also undergoing an IRS examination for fiscal years 2008–2011.
- Routine litigation was reported, with no pending proceedings expected to have a material effect. The board declared a $0.1775-per-share quarterly dividend payable December 3, 2012.
Most important facts for investors to verify
- Confirm the issuer: this document is SJW Corp.’s 10-Q and may not correspond to the requested H2O America.
- Track California and Texas regulatory decisions, including requested rate increases, interim relief and potential refund exposure.
- Assess water availability, supply restrictions, purchased-water costs and seasonal consumption.
- Compare planned capital spending and funding needs with operating cash generation, available credit and debt covenant headroom.
- Monitor the IRS examination, pension and postretirement obligations, and the planned disposition of the Connecticut property.