UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
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Commission file number 1-8966
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SJW Corp.
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(Exact name of registrant as specified in its charter)
California 77-0066628
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
374 West Santa Clara Street, San Jose, CA 95196
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(Address of principal executive offices) (Zip Code)
408-279-7800
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No _
Indicate by check mark whether the registrant is an accelerated
filer. Yes x No _
APPLICABLE ONLY TO CORPORATE ISSUERS:
Common shares outstanding as of May 1, 2003 are 3,045,147.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
(In thousands, except share and per share data)
THREE MONTHS ENDED
MARCH 31
2003 2002
-------------------
OPERATING REVENUE $27,791 $27,718
OPERATING EXPENSE:
Operation:
Purchased water 6,047 5,687
Power 737 1,340
Pump taxes 2,068 3,617
Other 6,762 5,953
Maintenance 1,773 1,991
Property taxes and other nonincome taxes 1,269 1,150
Depreciation and amortization 3,740 3,506
Income taxes 1,419 1,102
------------------
Total operating expense 23,815 24,346
------------------
OPERATING INCOME 3,976 3,372
Gain on sale of nonutility property, net 3,030 -
Interest on long-term debt (2,086) (2,082)
Dividends 309 308
Other, net 53 151
------------------
NET INCOME $5,282 $1,749
==================
Other comprehensive income (loss):
Unrealized income (loss) on investment $2,310 $ (164)
Income taxes related to other
comprehensive income (loss) (947) 67
------------------
Other comprehensive income (loss), net 1,363 (97)
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COMPREHENSIVE INCOME $6,645 $1,652
==================
BASIC EARNINGS PER SHARE $ 1.73 $ 0.57
==================
COMPREHENSIVE INCOME PER SHARE $ 2.18 $ 0.54
==================
DIVIDENDS PER SHARE $ 0.73 $ 0.69
==================
WEIGHTED AVERAGE SHARES OUTSTANDING 3,045,147 3,045,147
See Accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
MARCH 31 DECEMBER 31
2003 2002
-------- -----------
ASSETS
UTILITY PLANT $556,138 $541,919
Less accumulated depreciation
and amortization 165,724 161,576
-------- --------
Net utility plant 390,414 380,343
NONUTILITY PROPERTY 11,854 12,083
Less accumulated depreciation 1,655 1,596
-------- --------
Net nonutility property 10,199 10,487
CURRENT ASSETS:
Cash and equivalents 1,798 324
Cash on deposit for property exchange 5,384 -
Accounts receivable and accrued utility
revenue 13,773 16,721
Prepaid expenses and other 1,291 1,654
-------- --------
Total current assets 22,246 18,699
OTHER ASSETS:
Investment in California Water Service Group 28,324 26,014
Investment in joint venture 1,153 1,144
Unamortized debt issuance and reacquisition
costs 3,452 3,493
Goodwill 1,744 1,744
Regulatory assets 6,991 6,013
Other 6,092 5,286
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Total other assets 47,756 43,694
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$470,615 $453,223
======== ========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common stock $ 9,516 $ 9,516
Additional paid-in capital 12,357 12,357
Retained earnings 131,309 128,242
Accumulated other comprehensive income 4,747 3,384
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Shareholders' equity 157,929 153,499
Long-term debt 110,000 110,000
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Total capitalization 267,929 263,499
CURRENT LIABILITIES:
Line of credit 7,600 11,450
Accrued pump taxes and purchased water 3,237 3,144
Purchased power 1,199 1,219
Accounts payable 6,987 381
Accrued interest 2,126 3,244
Accrued taxes 2,165 634
Other current liabilities 3,372 3,528
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Total current liabilities 26,686 23,600
DEFERRED INCOME TAXES AND CREDITS 34,660 29,704
ADVANCES FOR AND CONTRIBUTIONS IN AID OF
CONSTRUCTION 130,981 126,714
OTHER NONCURRENT LIABILITIES 10,359 9,706
-------- --------
$470,615 $453,223
======== ========
See Accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
THREE MONTHS ENDED
MARCH 31
2003 2002
OPERATING ACTIVITIES: ------- -------
Net income $5,282 $1,749
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,740 3,506
Deferred income taxes and credits 2,851 40
Other noncurrent assets and noncurrent
liabilities (1,228) 399
Gain on sale of nonutility property, net of
taxes (3,030) -
Changes in operating assets and liabilities:
Cash on deposit for property exchange (5,384) -
Accounts receivable and accrued utility
revenue 2,948 (695)
Accounts payable, purchased power and other
current liabilities 6,430 3,541
Accrued pump taxes and purchased water 93 1,510
Accrued taxes 1,531 1,615
Accrued interest (1,118) (1,032)
Other changes, net (314) (72)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 11,801 10,561
INVESTING ACTIVITIES:
Additions to utility plant (14,242) (11,702)
Additions to nonutility property (8) (103)
Cost to retire utility plant, net of salvage (45) (98)
Proceeds from sale of nonutility property 5,370 -
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NET CASH USED IN INVESTING ACTIVITIES (8,925) (11,903)
FINANCING ACTIVITIES:
Repayments for line of credit, net of
borrowings (3,850) (5,200)
Dividends paid (2,215) (2,101)
Advances for and contributions in aid of
construction 4,935 5,896
Refunds of advances for construction (272) (235)
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NET CASH USED IN FINANCING ACTIVITIES (1,402) (1,640)
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NET CHANGE IN CASH AND EQUIVALENTS 1,474 (2,982)
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CASH AND EQUIVALENTS, BEGINNING OF PERIOD 324 5,021
------- -------
CASH AND EQUIVALENTS, END OF PERIOD $1,798 $2,039
======= =======
Cash paid (received) during the period for:
Interest $3,198 $3,182
Income tax refund (2,592) -
See Accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
Note 1. General
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In the opinion of SJW Corp., the accompanying unaudited condensed
consolidated financial statements contain all adjustments,
consisting only of normal recurring adjustments, necessary for
the fair presentation of the results for the interim periods.
The Notes to Consolidated Financial Statements in SJW Corp.'s
2002 Annual Report on Form 10-K should be read with the
accompanying condensed consolidated financial statements.
Basic earnings per share and comprehensive income per share are
calculated using income available to common shareholders and
comprehensive income, respectively, divided by the weighted
average number of shares outstanding during the year. SJW Corp.
has no dilutive securities, and accordingly, diluted earnings per
share is not shown.
SJW Corp. and its subsidiaries operate predominantly in one
reportable business segment of providing water utility service to
its customers.
Note 2. Long-Term Incentive Plan
- ---------------------------------
On April 29, 2003, SJW Corp. amended its Long-Term Incentive Plan
(Incentive Plan) which was originally adopted on April 18, 2002.
Under the Incentive Plan, 300,000 shares of common stock have
been reserved for issuance. The amendment will allow SJW Corp.
to provide key employees, including officers, and non-employee
directors, the opportunity to acquire a meaningful equity
interest in the company. In no event may any one participant in
the Incentive Plan receive awards under the Incentive Plan in any
calendar year covering an aggregate of more than 100,000 shares
of the common stock. Additionally, awards granted under the
Incentive Plan may be conditioned upon the attainment of
specified performance goals. The types of awards included in the
Incentive Plan are stock options, dividend units, performance
shares, rights to acquire restricted stock and stock bonuses.
Subsequent to the first quarter of 2003, SJW Corp. issued 9,643
options for the purchase of common stock and 13,890 shares of
restricted stock to employees under the Incentive Plan.
Note 3. Sale of Nonutility Property
- ------------------------------------
On March 11, 2003, SJW Land Company sold San Tomas station, a
nonutility property, to Santa Clara Valley Water District (SCVWD)
for a contract price of $5,400,000. SJW Corp. recognized a gain
on sale of nonutility property of $3,030,000, net of tax of
$2,105,000 in connection with the sale. In April 2003,
subsequent to the end of the first quarter, SJW Land Company
reinvested the property sale proceeds by acquiring two income
properties in the States of Connecticut and Florida, at a total
purchase price of $15,400,000. In connection with the purchases,
SJW Land Company executed mortgages in the amount of $9,900,000.
The purchase transactions were completed on April 21, 2003.
Note 4. Impact of Recent Accounting Pronouncements
- ---------------------------------------------------
In June 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
143, "Accounting for Asset Retirement Obligations", which applies
to legal obligations that are associated with the retirement of
long-lived assets and the associated asset retirement costs. The
statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002. SJW Corp. adopted SFAS No.
143 in January 2003. The adoption of SFAS No. 143 did not have
an impact on SJW Corp.'s financial condition or results of
operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections". Among other provisions, SFAS No. 145
rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt". Accordingly, gains or losses from
extinguishment of debt shall not be reported as extraordinary
items unless the extinguishment qualifies as an extraordinary
item under the criteria of APB No. 30. Gains or losses from
extinguishment of debt that do not meet the criteria of APB No.
30 should be reclassified to income from continuing operations in
all prior periods presented. SFAS No. 145 is effective for
fiscal years beginning after May 15, 2002. SJW Corp. adopted
SFAS No. 145 in January 2003. The adoption of SFAS No. 145 did
not have an impact on SJW Corp.'s financial condition or results
of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement
requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the
date of a commitment to an exit or disposal plan. Examples of
costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a
restructuring, discontinued operation, a plant closing, or other
exit or disposal activities. The provisions of this statement
are effective for exit and disposal activities that are initiated
by a company after December 31, 2002. SJW Corp. adopted SFAS No.
146 in January 2003. The adoption of SFAS No. 146 did not have
an impact on SJW Corp.'s financial condition or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". This
statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a
voluntary change to the fair value-based method of accounting for
stock-based employee compensation. It also amends the disclosure
provisions to require prominent disclosures pertaining to the
effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation.
SFAS No. 148 was effective for SJW Corp. as of December 31, 2002.
SJW Corp. intends to account for the stock-based compensation
under SFAS No. 123 when stock options are issued, therefore, the
adoption of SFAS No. 148 did not have an impact on SJW Corp.'s
financial condition or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements within the
meaning of the federal securities laws relating to future events
and future results of SJW Corp. and its subsidiaries that are
based on current expectations, estimates, forecasts, and
projections about the industries in which SJW Corp. operates and
the beliefs and assumptions of the management of SJW Corp. Such
forward-looking statements are identified by words including
"expect", "estimate", "anticipate" and similar expressions.
These forward-looking statements are only predictions and are
subject to risks, uncertainties, and assumptions that are
difficult to predict. Therefore, actual results may differ
materially and adversely from those expressed in any forward-
looking statements. Important factors that could cause or
contribute to such differences include, but are not limited to,
those discussed in this report under the section entitled
"Factors that May Affect Future Results" and elsewhere, and in
other reports SJW Corp. files with the Securities and Exchange
Commission ("SEC"), specifically the most recent reports on Form
10-K, Form 10-Q and Form 8-K, each as it may be amended from time
to time. SJW Corp. undertakes no obligation to update the
information contained in this report, including the forward-
looking statements to reflect any event or circumstance that may
arise after the date of this report.
General:
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SJW Corp. was incorporated in California on February 8, 1985.
SJW Corp. is a holding company with three subsidiaries.
San Jose Water Company, a wholly owned subsidiary, with
headquarters at 374 West Santa Clara Street in San Jose,
California 95196, was originally incorporated under the laws of
the State of California in 1866. The company was later
reorganized and reincorporated as the San Jose Water Works. San
Jose Water Works was reincorporated in 1985 as San Jose Water
Company, with SJW Corp. as the parent holding company. San Jose
Water Company is a public utility in the business of providing
water service to a population of approximately one million people
in an area comprising about 138 square miles in the metropolitan
San Jose area. San Jose Water Company's web site can be accessed
via the Internet at http://www.sjwater.com.
The principal business of San Jose Water Company consists of the
production, purchase, storage, purification, distribution and
retail sale of water. San Jose Water Company provides water
service to customers in portions of the cities of Cupertino and
San Jose and in the cities of Campbell, Monte Sereno, Saratoga
and the Town of Los Gatos, and adjacent unincorporated territory,
all in the County of Santa Clara in the State of California. It
distributes water to customers in accordance with accepted water
utility methods, which include pumping from storage and gravity
feed from high elevation reservoirs. San Jose Water Company also
provides nonregulated water related services under agreements
with municipalities. These nonregulated services include full
water system operations, billings and cash remittances.
SJW Land Company, a wholly owned subsidiary, was incorporated in
1985. SJW Land Company owns and operates parking facilities,
which are located adjacent to San Jose Water Company's
headquarters and the HP Pavilion in San Jose, California. SJW
Land Company also owns commercial buildings and other undeveloped
land primarily in the San Jose Metropolitan area, and a 70%
limited partnership interest in 444 West Santa Clara Street, L.P.
Crystal Choice Water Service LLC, a 71% majority-owned limited
liability subsidiary formed in January 2001, engages in the sale
and rental of water conditioning and purification equipment.
SJW Corp. also owns 1,099,952 shares of California Water Service
Group.
Critical Accounting Policies:
- -----------------------------
SJW Corp. has identified accounting policies below as the
policies critical to the business operations and the
understanding of the results of operations. The preparation of
financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, and revenues and expenses. SJW Corp. bases its
estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances. The impact and any associated risks related to
these policies on the company's business operations is discussed
throughout "Management's Discussion and Analysis of Financial
Condition and Results of Operations" where such policies affect
the company's reported and expected financial results. The
company's critical accounting policies are as follows:
Balancing Account
The California Public Utilities Commission (CPUC) establishes a
balancing account mechanism within its regulatory regime. A
separate balancing account must be maintained for each offset
expense item (e.g. purchased water, purchased power and pump
tax). The purpose of a balancing account is to track the under-
collection or over-collection associated with expense changes and
the revenue authorized by the CPUC to offset those expense
changes. Since balances are being tracked and have to be
approved by the CPUC before they can be incorporated into rates,
San Jose Water Company has not recognized the balancing account
in its financial statements. Had the balancing account under-
collection been recognized in San Jose Water Company's financial
statements, San Jose Water Company's retained earnings would be
increased by the amount of balancing account under-collection
less applicable taxes. As of March 31, 2003 and December 31,
2002, San Jose Water Company has a balance of $167,760 and
$262,000, respectively, to be collected from its customers.
Accrued Unbilled Revenue
San Jose Water Company reads the majority of its customer's
meters on a bi-monthly basis and records its revenue based on its
meter reading results. Revenues from the meter reading date to
the end of the accounting period is estimated based on historical
usage patterns, production records and the effective tariff
rates. The estimate of the unbilled revenue is a management
estimate utilizing certain sets of assumptions and conditions
which include the number of days between meter reads for each
billing cycle, the customers' consumption changes, and the
company's experiences in unaccounted-for water. Actual results
could differ from those estimates, which would result in
operating revenue being adjusted in the period that the revision
to the company's estimates is determined. As of March 31, 2003
and December 31, 2002, accrued utility revenue was $6,345,000 and
$6,605,000, respectively.
Recognition of Regulatory Assets and Liabilities
Generally accepted accounting principles for water utilities
include the recognition of regulatory assets and liabilities as
permitted by SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation". In accordance with SFAS No. 71, San Jose
Water Company records deferred costs and credits on the balance
sheet as regulatory assets and liabilities when it is probable
that these costs and credits will be recovered in the ratemaking
process in a period different from when the costs and credits
were incurred. Accounting for such costs and credits is based on
management's judgments that it is probable that these costs will
be recoverable in the future revenue of the company through the
ratemaking process. The regulatory assets and liabilities
recorded by San Jose Water Company primarily relate to the
recognition of deferred income taxes for ratemaking versus tax
accounting purposes. The disallowance of any asset in future
ratemaking purposes, including the deferred regulatory assets,
would require San Jose Water Company to immediately recognize the
impact of the costs for financial reporting purposes.
Income Taxes
SJW Corp. estimates its federal and state income taxes as part of
the process of preparing the financial statements. The process
involves estimating the actual current tax exposure together with
assessing temporary differences resulting from different
treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included within the balance sheet. In the event that actual
results differ from these estimates, the provision for income
taxes could be materially impacted.
Pension Accounting
San Jose Water Company offers a defined benefit plan,
Supplemental Executive Retirement Plan and certain post-
retirement benefits other than pensions to employees retiring
with a minimum level of service. Accounting for pensions and
other post-retirement benefits requires an extensive use of
assumptions about the discount rate, expected return on plan
assets, the rate of future compensation increase received by the
employees, mortality, turnover and medical costs.
San Jose Water Company, through its Retirement Plan
Administrative Committee managed by the representatives from the
unions and management establishes investment guidelines with
specification that at least 30% of the investments are in bonds
or cash. As of March 31, 2003, the plan assets consist of
approximately 30% bonds, 10% cash and 60% equities. Furthermore,
equities are to be diversified by industry groups to balance for
capital appreciation and income. In addition, all investments
are publicly traded. The company uses an expected rate of return
on plan assets of 8% in its actuarial computation that is below
the company's annualized actual rate of return of 10.5% measured
from 1984 through 2002. The distributions of assets are
conservative and are less affected by market volatility.
Furthermore, foreign assets are not included in the investment
profile and thus a risk related to foreign exchange fluctuation
is eliminated.
The market values of the plan assets are marked to market at the
measurement date. The investment trust assets suffered
significant unrealized market losses in the last two years.
Significant unrealized market losses on pension assets are
amortized over 14 years for actuarial expense calculation
purposes.
The company utilizes Moody's 'A' and 'Aa' rated bonds in
industrial, utility and financial sectors with outstanding amount
of $1 million or more in determining the discount rate used in
calculating the liabilities at the measurement date. For the
year ending December 31, 2002, the composite discount rate used
was 6.75%.
Liquidity and Capital Resources:
- --------------------------------
San Jose Water Company's budgeted capital expenditures for 2003,
exclusive of capital expenditures financed by customer
contributions and advances, are $28,667,000 with capital
expenditures concentrated in main replacements. Approximately
$13,000,000 will be spent to replace San Jose Water Company's
aging mains in 2003.
The four-phased Infrastructure Study, which was started by San
Jose Water Company in 1997 with the purpose of establishing a
systematic approach to replace its utility facilities, was
completed by July 2002. The Infrastructure Study analyzed the
company's pipes and mains and examined all other utility
facilities and will be used as a guide for future capital
improvement programs, and serve as the master plan for the
company's replacement program for the next 20 years.
San Jose Water Company's capital expenditures are incurred in
connection with normal upgrading and expansion of existing
facilities and to comply with environmental regulations. San
Jose Water Company expects to incur approximately $155,000,000,
exclusive of customer contributions and advances, in capital
expenditures over the next five years. The company's actual
capital expenditures may vary from its projections due to changes
in the expected demand for services, weather patterns, and
actions by governmental agencies and general economic conditions.
Total additions to utility plant normally exceed company-financed
additions by several million dollars because certain new
facilities are constructed using advances from developers and
contributions in aid of construction.
A substantial portion of San Jose Water Company's distribution
system was constructed during the period from 1945 to 1980.
Expenditure levels for renewal and modernization of this part of
the system will grow at an increasing rate as these components
reach the end of their useful lives. In most cases, replacement
cost will significantly exceed the original installation cost of
the retired assets due to increases in the costs of goods and
services.
As of March 31, 2003, SJW Corp.'s share of capital investment in
Crystal Choice Water Service LLC approximated 71%. SJW Corp.
expects to invest an additional $50,000 in Crystal Choice Water
Service LLC in 2003. The capital is invested primarily in rental
equipment used by Crystal Choice Water Service LLC in its rental
operation.
The water utility business is highly seasonal in nature. Customer
consumption demand during summer months could significantly
exceed that of winter months. Operating revenue, accounts
receivable and unbilled revenue increase as customer consumption
increases. Historically, San Jose Water Company's write-offs for
uncollectible accounts represent less than 1% of its total
revenue. Management believes it can continue to collect its
accounts receivable balances at its historical collection rate.
Accounts payable and current liabilities increase during the
summer months due to increased water production volume to meet
higher customer demand and timing of payment of certain expenses.
Please refer to "Sources of Capital" for further discussion.
Sources of Capital:
- -------------------
San Jose Water Company's ability to finance future construction
programs and sustain dividend payments depends on its ability to
attract external financing and maintain or increase internally
generated funds. The level of future earnings and the related
cash flow from operations is dependent, in large part, upon the
timing and outcome of regulatory proceedings.
San Jose Water Company has outstanding $110,000,000 of unsecured
senior notes as of March 31, 2003. The senior note agreements of
San Jose Water Company generally have terms and conditions that
restrict the company from issuing additional funded debt if (1)
the funded debt would exceed 66-2/3% of total capitalization, and
(2) net income available for interest charges for the trailing
twelve calendar month period would be less than 175% of interest
charges. As of March 31, 2003, San Jose Water Company's funded
debt was 46.2% of total capitalization and the net income for
preceding twelve months was 453% of interest charges.
In March 2003, SJW Land Company sold nonutility property and
recognized a gain of $3,030,000, net of tax. Subsequent to the
end of the first quarter, SJW Land Company reinvested the
proceeds from the sale of nonutility property by acquiring two
properties in the States of Connecticut and Florida. In
connection with the acquisition, SJW Land Company executed
mortgages in the amount of $9,900,000 in April 2003. The
mortgage loans are due in ten years and amortized over twenty-
five years with a fixed interest rate of 5.96%.
San Jose Water Company's financing activity is designed to
achieve a capital structure consistent with regulatory guidelines
of approximately 50% debt and 50% equity.
San Jose Water Company intends to issue $20,000,000 of senior
notes in the fourth quarter of 2003. Proceeds from the sale of
the senior notes will be used to repay short-term borrowings and
fund construction expenditures.
In 2002, the Department of Water Resources approved San Jose
Water Company's application for an approximately $2,500,000 Safe
Drinking Water State Revolving Fund twenty-year loan at an
interest rate of approximately 2.39%. Funds in the above amount
will be received for the retrofit of San Jose Water Company's
water treatment plant. San Jose Water Company will request the
funding in 2003 as soon as all the loan documentation and
contract requirements are met.
SJW Corp. and its subsidiaries have unsecured lines of credit
available allowing aggregate short-term borrowings of up to
$30,000,000 at rates that approximate the bank's prime or
reference rate. At March 31, 2003, SJW Corp. and its
subsidiaries had available unused short-term bank lines of credit
of $22,400,000. Cost of borrowing averaged 2.56% for the first
three months of 2003. The line of credit expires on August 1,
2003.
Results of Operations
- ---------------------
Overview
- --------
SJW Corp.'s consolidated net income for the three months ended
March 31, 2003 was $5,282,000, an increase of $3,533,000 or 202%
from $1,749,000 for the same period in 2002.
Operating Revenue
- -----------------
Three months
Consolidated Operating Revenue ended March 31,
(in thousands) 2003 2002
- ------------------------------------------------------------
San Jose Water Company $26,991 $27,018
SJW Land Company 546 544
Crystal Choice Water Service 254 156
------- -------
$27,791 $27,718
======= =======
Consolidated operating revenue for the three months ended March
31, 2003 increased by $73,000 over the $27,718,000 for the same
period in 2002 due mainly to two rate increases in the period
from July 2002 through January 2003 which was offset by a 7%
decrease in customer consumption.
The change in consolidated operating revenue was due to the
following factors:
Three months ended
March 31, 2003 vs. 2002
(in thousands) Increase/(decrease)
- ----------------------------------------------------------------
Utility:
Consumption changes $(1,063) (4%)
New customers increase 83 -
Rate increases 953 3%
Parking and rental 2 -
Crystal Choice Water Service 98 1%
------ ------
$ 73 -
====== ======
Operating Expense
- -----------------
Three months
Consolidated Operating Expense ended March 31,
Excluding Income Taxes (in thousands) 2003 2002
- ------------------------------------------------------------
San Jose Water Company $21,742 $22,659
SJW Land Company 181 174
Crystal Choice Water Service 314 282
SJW Corp. 159 129
------- -------
$22,396 $23,244
======= ========
The change in consolidated operating expenses, excluding income
taxes, from the same period in 2002 was due to the following
factors:
Three months ended
March 31, 2003 vs. 2002
(in thousands) Increase/(decrease)
- --------------------------------------------------------------
Production costs:
Increased surface water supply $(1,203) (5%)
Decrease in usage and new customers (787) (4%)
Pump tax and purchased water
price increase 226 1%
Energy price and usage (28) -
----- ----
Total production costs (1,792) (8%)
Other operating expense 809 4%
Maintenance (218) (1%)
Property taxes and other
Nonincome taxes 119 -
Depreciation and amortization 234 1%
------ ----
$ (848) (4%)
====== ====
Water production costs decreased $1,792,000 or 17% for the first
quarter of 2003. The decrease in water production costs was
primarily due to an approximately 7% decrease in customer
consumption and an increase in less costly surface water supply.
The cost decreases were partially offset by an increase in Santa
Clara Valley Water District (SCVWD) water production rates (pump
tax and purchased water) in July 2002. Water production in the
first quarter of 2003 was lower than the same period in 2002 due
to a change in customer consumption.
San Jose Water Company's water supply is obtained from wells,
surface run-off and diversion and by purchases from the SCVWD.
Surface water supply is the least expensive source of water and
the availability of a slightly higher surface water supply
reduced water production costs in the first quarter of 2003 by
$1,203,000.
The change in San Jose Water Company's source of supply mix was
as follows:
Three months ended
March 31, 2003 vs. 2002
(in million gallons) Increase/(decrease)
- -------------------- -----------------------
Purchased water 160 2%
Ground water (1,577) (18%)
Surface water 956 11%
Reclaimed water (7) -
----- ------
(468) (5%)
===== ======
The changes in the source of supply mix were consistent with the
changes in the water production costs.
Consolidated operating expense in the first quarter of 2003,
excluding income taxes and production costs, increased $944,000
compared to the same period in 2002. The increases included
$291,000 in pension costs primarily as a result of the decline in
the market value of retirement trust assets, $145,000 in salaries
and wages in accordance with bargaining unit wage escalation and
new hires, $118,000 in additional professional fees and $325,000
in business and employee insurance costs. Depreciation increased
$234,000 due to higher investment in utility plants.
Total income tax expense for the first quarter was $3,524,000,
which included income tax expense from operations of $1,419,000,
and income tax expense on the gain on sale of nonutility property
of $2,105,000. Income tax expense reported on the Condensed
Consolidated Statements of Income which excludes taxes on the
sale of nonutility property increased $317,000 or 29%, in
comparison to the first quarter of 2002 due to higher earnings in
2003. The effective income tax rates for the first quarter of
2003 and 2002 approximated 41% and 39%, respectively.
Other income includes an after-tax gain of $3,030,000 on the sale
of a nonutility property. In April 2003, SJW Corp. reinvested
the sale proceeds in two income properties in the States of
Connecticut and Florida. Please refer to Note 3. "Gain on Sale
of Nonutility Property" under "Notes to Unaudited Condensed
Consolidated Financial Statements" in Item 1. "Financial
Statements".
The decrease in other income and expense of $98,000 resulted from
higher interest expenses due to higher average borrowing.
Since the water business is highly seasonal in nature, a
comparison of the revenue and expense of the current quarter with
the immediately preceding quarter would not be meaningful. The
first quarter is normally the quarter with the lowest average
usage per metered customer and is not indicative of the results
for the calendar year. The average usage per metered customer in
the first quarter of 2003 was 47 ccf, a decrease of 3 ccf or 7%
from 50 ccf in the first quarter of 2002.
Other comprehensive income was $1,363,000 for the three months
ended March 31, 2003 in comparison to the comprehensive loss of
$97,000 for the three months ended March 31, 2002 due to the
changes in market value of investment in California Water Service
Group.
Factors That May Affect Future Results
- --------------------------------------
Pension and Insurance
- ---------------------
In 2003, pension accruals increased $1,113,000 on an annual basis
primarily due to the decline in valuation of the retirement plan
portfolio in 2002. Market conditions, not changes in operating
risk or loss experience, were the sole reason for the average
company's liability insurance cost increase of 47% in the first
quarter of 2003 after adjustments in self-insured retentions.
Nonregulated Operations
- -----------------------
In January 2002, SJW Land Company entered into an Agreement for
Possession and Use (Agreement) with Valley Transportation Agency
(VTA) whereby SJW Land Company has granted VTA an irrevocable
right to possession and use of 1.23 acres of the company's
parking lot property for the development of a light rail station.
VTA has adopted a resolution authorizing a condemnation
proceeding to acquire the land and has deposited $3.7 million in
an escrow account as fair market compensation. SJW Land Company
waived the right to challenge VTA's possession and use in any
subsequent eminent domain proceeding but reserved the right to
assert, and has disputed the fair market value placed on the
land. According to the terms of the Agreement, if a settlement
is not reached within three months of the execution of the
Agreement, VTA can file an eminent domain complaint to acquire
title to the parking lot property. On April 11, 2003, VTA filed
the eminent domain lawsuit. As a part of the proceedings, VTA
has transferred funds from the escrow account into court deposit
to secure its ongoing right of possession for construction of the
light rail station pending final litigation. Compensation for the
taking of property will be determined by the court or by way of
settlement between SJW Land Company and VTA. This transaction
will be booked and is expected to result in an increase to net
income, if and when the compensation issue is settled or a final
court order is rendered.
Water Supply and Energy Resources
- ---------------------------------
San Jose Water Company's water supply is obtained from wells,
which is the groundwater, surface run-off and diversion and by
purchases from the SCVWD under the terms of a master contract
with SCVWD expiring in 2051. Groundwater level in 2003 was well
above the 30-year normal aquifer storage point.
On April 9, 2003, the SCVWD's ten reservoirs were 55.1% full with
93,321 acre-feet of water in storage. The rainfall in the winter
of 2003 was about average.
On April 18, local surface water in San Jose Water Company's
impoundments was at 90% of capacity. Local surface water is a
less costly source of water and its availability significantly
impacts the results of operations.
In the Water Utility Enterprise Report published by SCVWD on
April 1, 2003, the SCVWD stated that only 50% of SCVWD's
entitlement for state and federal raw water projects would be
received. SCVWD treats the raw water and distributes treated
water to its wholesale customers including San Jose Water
Company. Storms coming in late April added significantly to the
snow pack and consequently, a greater percentage of the
entitlement delivery is anticipated.
Therefore, San Jose Water Company believes that its various
sources of water supply are sufficient to meet customer demand
for the remainder of the year.
To the extent that San Jose Water Company has to pump water
during peak periods to satisfy customer demand when imported
water is not available, higher energy costs will be incurred.
Currently, the CPUC has no established procedure for water
utilities to recover the additional costs incurred due to such
unanticipated changes in water supply mix. There can be no
assurance that such costs will be recovered in full or in part.
Security Issues
- ---------------
San Jose Water Company has taken steps to increase security at
its water utility facilities and continue to implement a
comprehensive security upgrade program for production and storage
facilities, booster pump stations and company buildings. During
2001 and 2002, $480,000 was spent on capital projects to improve
and enhance security. SJW Corp. did not spend any significant
amount in security enhancement in the first quarter of 2003.
San Jose Water Company also coordinates security and planning
information with eight other large regional water utilities
within the San Francisco Bay area, as well as various
governmental and law enforcement agencies.
San Jose Water Company conducted a system-wide vulnerability
assessment in compliance with federal regulations Public Law 107-
188 imposed on all water utilities. The assessment report was
filed with the government on March 31, 2003. The vulnerability
assessment identified system security enhancements that impact
water quality, health, safety and continuity of service totaling
approximately $2,300,000. These improvements shall be
incorporated into the capital budgets to be completed by 2005.
Approximately $600,000 will be spent in 2003. Once completed,
San Jose Water Company believes it will be less vulnerable to
terrorists' attack than most other water utility in the country.
San Jose Water Company actively participated in the security
vulnerability assessment training offered by the American Water
Works Association Research Foundation and the Environmental
Protection Agency.
San Jose Water Company is currently revising its Emergency
Responsibility Plans (ERP) and will issue the plans in advance of
the September 30, 2003 deadline set forth by the legislation.
The ERPs will include training and implementation of new
procedures and communications.
Regulatory Affairs
- ------------------
Almost all the operating revenue of San Jose Water Company
results from the sale of water at rates authorized by the CPUC.
The CPUC sets rates that are intended to provide revenue
sufficient to recover operating expenses and produce a reasonable
return on common equity. The company's most recent rate
decision, approved in April 2001, authorized a return on common
equity in 2001, 2002 and 2003 of 9.95%. This is within the range
of recent rates of return authorized by the CPUC for water
utilities. San Jose Water Company received step rate increases
in January and March of 2003 totaling about 3.41% to recover
projected operating cost increase for 2003 as well as the
increased costs associated with the transfer of the maintenance
responsibility for approximately 12,000 fire hydrants from the
City of San Jose to San Jose Water Company.
On September 30, 2002 Governor Davis signed the interim rate bill
(AB 2838), sponsored by the California water utility industry,
into law. The bill allows for the implementation of interim
water rates in general rate cases when the CPUC fails to
establish new rates in accordance with the established rate case
schedule. The interim rates would be based on a water company's
existing rates increased for the amount of inflation since the
last approved rate adjustment. The bill also allows for a
revenue true-up from the time of the implementation of the
interim rates to the time of the CPUC's ultimate decision in the
rate case. In principal, this mechanism is designed to eliminate
the adverse financial impact on water utilities caused by
regulatory delays in general rate cases. The bill went into
effect on January 1, 2003.
On April 3, 2003, the CPUC issued an Opinion modifying Decision
D.00-07-018, which originally established the rules and
guidelines for the use of water utility assets in nonregulated
activities. Pursuant to the recently issued Opinion, investor
owned water utilities are now required to file for the CPUC's
authority to enter into any nonregulated activity that utilizes
assets or employees reflected in the revenue requirement.
Previously certain activities that were specifically identified
in D.00-07-018 were exempt from this pre-approval requirement.
San Jose Water Company will need to obtain such an approval from
the CPUC before executing any nonregulated utility service
contracts with the parties involved. It is unclear, at this
time, the change to the rules will impact San Jose Water
Company's ability to participate in future nonregulated business
activities that utilize water utility assets or its employees.
On April 8, 2003, San Jose Water Company tendered its Notice of
Intent (NOI) to file a rate application with the CPUC. In the
NOI, San Jose Water Company has requested revenue increases of
$21,500,000 or 15% in 2004, $5,400,000 or 3% in 2005 and
$5,300,000 or 3% in 2006. The proposed revenue increases are
necessary to recover the projected higher water utility operating
costs and capital requirements projected for the three year
period.
On April 17, 2003, San Jose Water Company filed Advice Letter No.
342 with the CPUC requesting a revenue increase of $5,300,000 or
4% to recover the increased cost of purchased water and higher
pump tax charged to the company by SCVWD. If the proposed rates
are approved by the CPUC, they will become effective on or about
July 1, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
SJW Corp. is subject to market risks in the normal course of
business, including changes in interest rates and equity prices.
The exposure to changes in interest rates is a result of
financings through the issuance of fixed-rate, long-term debt and
short-term funds obtained through the variable rate line of
credit. SJW Corp. also owns 1,099,952 shares of California Water
Service Group and is exposed to the risk of changes in equity
prices.
The company has no derivative financial instruments, financial
instruments with significant off-balance sheet risks, or
financial instruments with concentrations of credit risk. There
is no material sensitivity to change in market rates and prices.
ITEM 4. CONTROLS AND PROCEDURES
(a.) Evaluation of disclosure controls and procedures.
Based on their evaluation as of March 31, 2003 which is
within 90 days of the filing date of this report, SJW
Corp.'s Chief Executive Officer and Chief Financial
Officer have concluded that SJW Corp.'s disclosure
controls and procedures (as defined in Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934
"Exchange Act")) are effective to ensure that
information required to be disclosed by SJW Corp. in
reports that it files or submits under the Exchange Act
is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange
Commission rules and forms.
(b.) Changes in internal controls. There have been no
significant changes in internal controls or in other
factors that could significantly affect these controls
subsequent to March 31, 2003, including any corrective
actions with regard to significant deficiencies and
material weaknesses.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2003 Annual Meeting of Shareholders of the SJW Corp. held
on April 29, 2003, ten directors were re-elected to the Board of
Directors, KPMG LLP was appointed as independent auditors for
2003, the amendment of Long-Term Incentive Plan and the authority
to vote in the discretion of the proxy holders was ratified by
the following votes:
Proposal 1: Election of Directors.
Name of Director In Favor Withheld
- ---------------- --------- -------
Mark L. Cali 2,675,726 28,029
J. Philip DiNapoli 2,674,226 29,529
Drew Gibson 2,674,626 29,129
Ronald R. James 2,672,152 31,603
Douglas King 2,675,497 28,258
George E. Moss 2,634,324 69,431
Roscoe Moss, Jr. 2,671,724 32,031
W. Richard Roth 2,676,477 27,278
Charles J. Toeniskoetter 2,674,626 29,129
Frederick R. Ulrich 2,672,136 31,619
Proposal 2: Ratification of appointment of independent auditors
for 2003:
In Favor Against Abstain No Votes
- -------- ------- ------- --------
2,664,485 26,482 12,788 -
Proposal 3: Ratification of adoption of Amendment of Long-Term
Incentive Plan:
In Favor Against Abstain No Votes
- -------- ------- ------- --------
2,385,731 261,903 56,120 1
Proposal 4: Ratification of authority to vote in the discretion
of the proxy holders:
In Favor Against Abstain No Votes
- -------- ------- ------- --------
2,517,530 167,695 18,529 1
ITEM 5. OTHER INFORMATION
On April 29, 2003, the Board of Directors of the SJW Corp.
declared the regular quarterly dividend of $.7275 per common
share. The dividend will be paid June 1, 2003, to shareholders
of record as of the close of business on May 12, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits required to be filed by Item 601 of Regulation
S-K.
99.1 Certification by President and Chief Executive
Officer.
99.2 Certification by Chief Financial Officer and
Treasurer.
(b.) Reports on Form 8-K.
SJW Corp. filed a current report on Form 8-K with the
Securities and Exchange Commission on May 6, 2003 which
announced the financial results of SJW Corp. for the
first quarter of 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SJW Corp.
Date: May 9, 2003 By /s/ ANGELA YIP
----------------
ANGELA YIP
Chief Financial Officer & Treasurer
CERTIFICATION
I, W. Richard Roth, President and Chief Executive Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of SJW
Corp. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003 --------------------------------
W. Richard Roth
President and
Chief Executive Officer
CERTIFICATION
I, Angela Yip, Chief Financial Officer and Treasurer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of SJW
Corp. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003 --------------------------------
Angela Yip
Chief Financial Officer
and Treasurer
EXHIBIT INDEX
-------------
Exhibit
No. Description of Document
- ------- -----------------------
99.1 Certification by President and Chief Executive Officer.
99.2 Certification by Chief Financial Officer and Treasurer.
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of SJW Corp. (the
"Company") on Form 10-Q for the quarterly period ended March 31,
2003, as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, W. Richard Roth, President and
Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly
presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ W. Richard Roth
- ---------------------
W. RICHARD ROTH
President and Chief Executive Officer
May 9, 2003
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of SJW, Corp. (the
"Company") on Form 10-Q for the quarterly period ended March 31,
2003, as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Angela Yip, Chief Financial
Officer and Treasurer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly
presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ Angela Yip
- ------------------
ANGELA YIP
Chief Financial Officer and Treasurer
May 9, 2003
33