Business context and reporting period
The supplied filing is SJW Corp.’s unaudited Form 10-Q for the quarter ended March 31, 2012—not a filing identified as H2O America. SJW is a holding company with regulated and nonregulated water operations and commercial real estate activities. Water sales are seasonal, so first-quarter results are not necessarily indicative of full-year performance. Unless noted otherwise, amounts below are in U.S. dollars, millions.
Financial results and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Operating revenue | $51.149 | $43.696; up 17% |
| Operating income | $6.725 | $5.601; up 20% |
| Operating margin | 13.2% | 12.8% |
| Net income | $1.109 | $0.610; up 82% |
| Basic and diluted EPS | $0.06 | $0.03 |
| Dividends per share | $0.18 | $0.17 |
| Cash from operating activities | $14.767 | $11.536 |
| Cash and cash equivalents, quarter-end | $19.261 | $26.734 at Dec. 31, 2011 |
| Long-term debt, including current portion | $344.445 | $344.686 at Dec. 31, 2011 |
| Shareholders’ equity | $262.217 | $264.004 at Dec. 31, 2011 |
Revenue growth reflected higher water usage ($4.682 million), rate increases ($2.449 million), new customers ($0.178 million), and higher real-estate revenue ($0.144 million). Water production costs rose $4.614 million, driven by greater usage, more purchased water and groundwater, higher unit costs, and reduced low-cost surface-water availability. Administrative and general expense increased $0.912 million; depreciation and amortization increased $0.514 million. Interest expense also increased, primarily due to senior notes issued in June 2011.
Operating cash flow exceeded net income, but investing activities used $19.854 million, including $17.467 million of company-funded utility-plant additions and $1.485 million for acquisitions and water rights. Financing activities used $2.386 million, including $3.305 million of dividends paid. Cash declined $7.473 million during the quarter. Current assets were $59.370 million and current liabilities $31.970 million (about 1.9x current coverage). Available unused short-term credit lines totaled $87 million; the facilities expire September 1, 2014 and carry variable rates. The filing reports long-term debt fair value of approximately $438.998 million versus book value of $344.445 million.
Material changes and operating developments
- Water Utility Services revenue increased to $49.898 million from $42.589 million; real-estate revenue rose to $1.251 million from $1.107 million.
- Water Utility Services used 16% more total water volume. Purchased-water volume rose 37%, while groundwater and surface-water volumes fell 14% and 7%, respectively. Purchased water is more costly than surface water.
- Management attributed the higher net income primarily to increased usage and rates, partly offset by higher production costs, administrative expenses, depreciation, and interest.
- Capital spending is substantial: 2012 Water Utility Services company-funded capital expenditures were budgeted at $97.813 million; the filing also estimates approximately $579 million over five years, subject to regulatory approval.
Outlook, risks, and contingencies
- Management believed available water supplies would meet customer demand through the remainder of 2012. However, as of early April, Santa Clara Valley Water District reservoirs were about 45% full and rainfall was about 50% of the seasonal average. Reduced State Water Project and Central Valley Project supplies under environmental restrictions could further constrain supply; lower surface-water availability can raise costs.
- San Jose Water Company’s general rate case, filed January 3, 2012, sought increases for 2013–2015 and recovery of certain under-collected costs, as well as proposed revenue decoupling and supply-cost balancing mechanisms. A decision was expected in the second half of 2012, with new rates anticipated from 2013; interim rates could be requested if a decision were delayed.
- A separate cost-of-capital proceeding was expected to receive a CPUC decision in Q2 2012. The filing describes an all-party settlement proposal with a 9.99% return on equity and 8.38% rate of return, but also notes further hearings; approval was not assured.
- San Jose Water Company’s Montevina treatment-plant upgrade request was pending. The filing describes planned project cost and timing inconsistently: approximately $73.7 million over five years in one passage and $73.5 million over four years elsewhere.
- CLWSC’s previously implemented 38% rate increase remained subject to adjustment and refund pending final TCEQ action; a decision was expected in Q2 2012.
- The company expected up to $10.5 million of pension and other postretirement plan contributions in 2012; $1.05 million had been contributed by March 31. An IRS examination covered tax years 2008 and 2009.
- The filing reports no pending litigation expected to have a material effect, no material market-risk sensitivity, and compliance with applicable debt covenants at quarter-end. The board declared a regular $0.1775-per-share dividend, payable June 1, 2012.
Important facts for investors to verify
- Confirm the issuer: the provided metadata says H2O America, while the filing itself identifies SJW Corp.
- Track CPUC and TCEQ rate-case outcomes, effective dates, and any refund exposure, including the status of proposed decoupling and balancing mechanisms.
- Monitor water availability, regulatory supply restrictions, and the resulting mix and cost of purchased, groundwater, and surface-water supplies.
- Reconcile planned capital spending and the Montevina project’s differing cost and timing descriptions in the filing; assess funding needs against operating cash flow and available credit.
- Consider seasonality when evaluating Q1 earnings, and note the decline in cash despite improved operating cash flow.