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, 2004
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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 the date of the report are
9,135,441.
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
2004 2003
(Restated
see Note 7)
-------------------
OPERATING REVENUE $31,063 $27,971
OPERATING EXPENSE:
Operation:
Purchased water 6,510 6,047
Power 814 737
Pump taxes 3,121 2,068
Administrative and general 4,310 3,770
Other 3,249 3,086
Maintenance 2,108 1,773
Property taxes and other nonincome taxes 1,329 1,269
Depreciation and amortization 4,393 3,740
Income taxes 1,244 1,419
------------------
Total operating expense 27,078 23,909
------------------
OPERATING INCOME 3,985 4,062
Gain on sale of nonutility property,
net of income taxes of $2,105 - 3,030
Interest on long-term debt (2,382) (2,086)
Dividend income 311 309
Other, net (140) (33)
------------------
NET INCOME $1,774 $5,282
==================
Other comprehensive income:
Unrealized income on investment $ 979 $2,310
Income taxes related to other
comprehensive income (401) (947)
------------------
Other comprehensive income, net 578 1,363
------------------
COMPREHENSIVE INCOME $2,352 $6,645
==================
EARNINGS PER SHARE
Basic $ 0.19 $ 0.58
Diluted $ 0.19 $ 0.58
==================
COMPREHENSIVE INCOME PER SHARE
Basic $ 0.26 $ 0.73
Diluted $ 0.26 $ 0.73
==================
DIVIDENDS PER SHARE $ 0.25 $ 0.24
==================
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 9,135,441 9,135,441
Diluted 9,187,890 9,135,441
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
MARCH 31 DECEMBER 31
2004 2003
(Restated
see Note 7)
-------- -----------
ASSETS
UTILITY PLANT:
Land $ 1,750 $ 1,750
Depreciable plant and equipment 580,034 570,119
Construction in progress 5,724 4,000
Intangible assets 7,840 7,840
-------- --------
Total utility plant 595,348 583,709
Less accumulated depreciation
and amortization 179,697 174,985
-------- --------
Net utility plant 415,651 408,724
NONUTILITY PROPERTY 35,222 34,918
Less accumulated depreciation 2,513 2,349
-------- --------
Net nonutility property 32,709 32,569
CURRENT ASSETS:
Cash and equivalents 10,030 10,278
Accounts receivable and accrued unbilled
utility revenue 15,243 15,043
Prepaid expenses and other 1,802 2,019
-------- --------
Total current assets 27,075 27,340
OTHER ASSETS:
Investment in California Water Service
Group 31,118 30,139
Unamortized debt issuance and reacquisition
costs 3,413 3,447
Regulatory assets 8,065 7,976
Other 5,636 6,049
-------- --------
Total other assets 48,232 47,611
-------- --------
$523,667 $516,244
======== ========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common stock $ 9,516 $ 9,516
Additional paid-in capital 13,681 13,375
Retained earnings 137,503 138,058
Accumulated other comprehensive income 5,996 5,419
-------- --------
Total shareholders' equity 166,696 166,368
Long-term debt, less current portion 143,935 143,947
-------- --------
Total capitalization 310,631 310,315
CURRENT LIABILITIES:
Current portion of long-term debt 139 184
Accrued pump taxes and purchased water 3,746 3,224
Purchased power 990 864
Accounts payable 7,088 2,217
Accrued interest 2,204 3,619
Accrued taxes 1,508 467
Other current liabilities 3,938 4,501
-------- --------
Total current liabilities 19,613 15,076
DEFERRED INCOME TAXES 39,733 38,207
ADVANCES FOR AND CONTRIBUTIONS IN AID OF
CONSTRUCTION 141,450 141,122
OTHER NONCURRENT LIABILITIES 12,240 11,524
-------- --------
$523,667 $516,244
======== ========
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
2004 2003
(Restated
see Note 7)
OPERATING ACTIVITIES: ------- -------
Net income $1,774 $5,282
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,393 3,757
Deferred income taxes 1,526 2,851
Stock-based compensation 306 -
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 (200) 2,948
Accounts payable, purchased power and other
current liabilities 4,434 6,430
Accrued pump taxes and purchased water 522 93
Accrued taxes 1,041 1,531
Accrued interest (1,415) (1,118)
Other noncurrent assets and noncurrent
liabilities 279 (1,240)
Other changes, net 747 (390)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 13,407 11,730
INVESTING ACTIVITIES:
Additions to utility plant (11,719) (14,242)
Additions to nonutility property (286) (8)
Cost to retire utility plant, net of salvage (19) (45)
Proceeds from sale of nonutility property - 5,370
------- --------
NET CASH USED IN INVESTING ACTIVITIES (12,024) (8,925)
FINANCING ACTIVITIES:
Borrowings from line of credit 2,500
Repayments of line of credit - (6,350)
Repayments of long-term borrowings (57) (17)
Dividends paid (2,330) (2,215)
Receipts of advances and contributions
in aid of construction 1,153 4,935
Refunds of advances for construction (397) (272)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (1,631) (1,419)
------- -------
NET CHANGE IN CASH AND EQUIVALENTS (248) 1,386
------- -------
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 10,278 581
------- -------
CASH AND EQUIVALENTS, END OF PERIOD $10,030 $1,967
======= =======
Cash paid during the period for:
Interest $3,955 $3,198
Income taxes - -
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
Note 1. General
- ----------------
In the opinion of SJW Corp. (the Corporation), 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
2003 Annual Report on Form 10-K should be read with the
accompanying condensed consolidated financial statements.
Water sales are seasonal in nature. The demand for water,
especially by residential customers, is generally influenced by
weather conditions. The timing of precipitation and climactic
conditions can cause seasonal water consumption by residential
customers to vary significantly. Due to the seasonal nature of
the water business, the operating results for interim periods are
not indicative of the operating results for a twelve-month
period. Revenue is generally higher in the warm, dry summer
months when water usage and sales are greater and lower in the
winter when cooler temperatures and increased rainfall curtail
water usage and sales.
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 period. Diluted
earnings per share and diluted comprehensive income per share are
based upon the weighted average number of common shares including
both shares outstanding and shares potentially issued in
connection with stock options and restricted common stock units
granted under SJW Corp. Long Term Incentive Plan, and income
available to common shareholders and comprehensive income,
respectively, adjusted for recognized stock compensation expense.
For the three months ended March 31, 2004 and 2003, the basic
weighted average number of common shares was 9,135,441. For the
three months ended March 31, 2004, the diluted weighted average
number of common shares outstanding was 9,187,890. There were no
common stock equivalents during the three-month period ended
March 31, 2003.
On January 29, 2004, the Board of Directors of SJW Corp. approved
a three-for-one stock split of common stock. The three-for-one
stock split was effective on March 2, 2004. Basic and diluted
earnings and comprehensive income per share in the current and
prior periods reflect the impact of stock split.
SJW Corp. and its subsidiaries operate predominantly in one
reportable business segment of providing water utility services
to its customers.
Note 2. Long-Term Incentive Plan
- ---------------------------------
Under the Long-Term Incentive Plan (Incentive Plan), which was
originally adopted on April 18, 2002 and subsequently amended on
April 29, 2003 by SJW Corp.'s shareholders, 900,000 common shares
have been reserved for issuance. As of March 31, 2004, no
securities have been issued pursuant to the Incentive Plan, and
157,299 shares are issuable upon the exercise of outstanding
options and deferred restricted stock. The remaining shares
available for issuance under the Incentive Plan are 742,701. The
total compensation cost charged to income under the Incentive
Plan was $291,000 for the three months ended March 31, 2004. The
total benefit, including non-employee directors' converted post-
retirement benefits, recorded in shareholders' equity under the
Incentive Plan was $306,000 which included $15,000 related to
dividend equivalent units issued during the first quarter of 2004
which had been earned during 2003 and were accrued as a liability
as of December 31, 2003.
Stock Options
Awards in the form of stock option agreements under the Incentive
Plan allow executives to purchase common shares at a specified
price. In January 2004, 26,076 options were issued at an
exercise price of $29.70 per share, and the weighted average fair
value of $5.33, at the date of grant. As of March 31, 2004,
55,185 options were issued and outstanding under the Incentive
Plan.
For the three months ended March 31, 2004, the Corporation has
recognized stock compensation expense of $33,000 for the 55,185
options granted to its executives.
Deferred Restricted Stock Plans
As of March 31, 2004, 41,670 restricted stock units have been
granted to a key employee of the Corporation. For the three
months ended March 31, 2004, the Corporation has recognized stock
compensation expense of $128,000 related to these restricted
stock units under the program.
As of March 31, 2004, 55,524 shares have been granted to non-
employee Board members who elected to receive their existing and
future cash pension benefits in restricted stock units under the
Deferred Restricted Stock Program. In accordance with SFAS No.
123, "Accounting for Stock-Based Compensation", the Corporation
has recognized stock compensation expense of $102,000 for the
three months ended March 31, 2004.
In January 2004, 3,636 shares were issued at an exercise price of
$29.75 per share, to the non-employee Board members who elected
to convert their annual retainer fee in restricted stock units
under the Deferred Restricted Stock Program. As of March 31,
2004, the Corporation has granted 4,920 deferred restricted
shares in lieu of cash retainer fees. For the three months ended
March 31, 2004, the Corporation has recognized stock compensation
expense of $28,000.
Dividend Equivalent Rights
SJW Corp. also has a Dividend Equivalent Rights Agreement
providing holders of options to receive dividend rights each time
a dividend is paid on common shares after the option grant date,
for a maximum period of four years.
Note 3. Partnership Interest
- -----------------------------
In January 2004, SJW Corp. adopted Interpretation No. 46(R),
"Consolidation of Variable Interest Entities" issued by the
Financial Accounting Standards Board (FASB). This interpretation
provides guidance for determining when a primary beneficiary
should consolidate a variable interest entity or equivalent
structure, that functions to support the activities of the
primary beneficiary.
SJW Land Company, a wholly owned subsidiary of SJW Corp., owns a
70% limited partnership in 444 West Santa Clara Street, L.P. (the
Partnership), a real estate limited partnership that owns and
operates an office building. The Corporation's interest in the
limited partnership had previously been accounted for as an
investment under the equity method of accounting.
As a result of adopting Interpretation No. 46(R), the Corporation
has restated its previously reported December 31, 2003
Consolidated Balance Sheets and its March 31, 2003 Consolidated
Statements of Income and Comprehensive Income as follows:
December 31, 2003
As As
Previously Reported Restated
------------------- --------
(in thousands)
Consolidated Balance Sheets:
Assets
Nonutility property $ 29,665 $ 34,918
Less: accumulated depreciation 2,036 2,349
-------- --------
Net nonutility property $ 27,629 $ 32,569
-------- --------
Cash and equivalents 10,036 10,278
Other assets 5,594 6,049
Liabilities:
Long-term debt $139,614 $143,947
March 31, 2003
As As
Previously Reported Restated
------------------- --------
(in thousands)
Consolidated Statements of Income
and Comprehensive Income:
Operating revenue $ 27,791 $ 27,971
Total operating expense 23,815 23,909
Minority interest included in
Other, net 53 (33)
There was no cumulative impact on retained earnings that resulted
from the adoption of Interpretation No. 46(R).
The Partnership has a mortgage loan in the outstanding amount of
$4,321,000 as of March 31, 2004. The mortgage loan is due in
April 2011 and amortized over twenty-five years with a fixed
interest rate of 7.80%. The mortgage loan is secured by the
Partnership's real property and is non-recourse to SJW Land
Company.
Note 4. Non-regulated Business
- -------------------------------
The business activities of SJW Corp. consist primarily of its
subsidiary, San Jose Water Company, a public utility regulated by
the California Public Utilities Commission (CPUC) and operates
within a service area approved by the CPUC. Included in the
total operating revenue and operating expense are the non-
regulated business activities of SJW Corp. The non-regulated
businesses of SJW Corp. are comprised of operating the City of
Cupertino Municipal Water Systems (CMWS), parking and lease
operations of several commercial buildings and properties of SJW
Land Company (SJW Land), and the sale and rental of water
conditioning and purification equipment of Crystal Choice Water
Service, LLC (CCWS). The following tables represent the
distribution of the regulated and non-regulated business
activities for the three months ended March 31, 2004 and 2003:
THREE MONTHS ENDED MARCH 31, 2004
---------------------------------
(in thousands)
Non-
Regulated regulated Total
--------- --------- ------
Revenue $29,051 $2,012 $31,063
Expenses 25,611 1,467 27,078
------- ------ -------
Operating income $ 3,440 $ 545 $ 3,985
======= ====== =======
THREE MONTHS ENDED MARCH 31, 2003
---------------------------------
(in thousands)
Non-
Regulated regulated Total
--------- --------- ------
Revenue $26,407 $1,564 $27,971
Expenses 22,701 1,208 23,909
------- ------ -------
Operating income $ 3,706 $ 356 $ 4,062
======= ====== =======
Note 5. Depreciable Plant and Equipment
- ----------------------------------------
The major components of depreciable plant and equipment as of
March 31, 2004 and December 31, 2003 are as follows:
March 31, December 31,
2004 2003
-------- ------------
(in thousands)
Equipment $ 47,703 $ 49,071
Transmission and distribution 438,221 455,030
Office building and other structures 94,110 66,018
-------- --------
Total $580,034 $570,119
======== ========
Depreciation of utility plant is computed using the straight-line
method over the estimated service lives of the assets, ranging
from 5 to 75 years. The estimated service lives of utility plant
are as follows:
Useful Lives
------------
Equipment 5 to 35 years
Transmission and distribution plant 35 to 75 years
Buildings, improvements, and
other structures 7 to 50 years
Intangible assets 25 to 40 years
Note 6. Nonutility Property
- ----------------------------
The major components of net nonutility property as of March 31,
2004 and December 31, 2003 are as follows:
March 31, December 31,
2004 2003
-------- -----------
(in thousands)
Land $ 9,485 $ 9,485
Buildings and improvements 25,506 25,202
Intangibles 231 231
Less: accumulated depreciation 2,432 2,268
Less: accumulated amortization 81 81
-------- -------
Total $ 32,709 $32,569
======== =======
Depreciation of nonutility property is computed using the
straight-line method over the estimated service lives of the
assets, ranging from 5 to 75 years. Refer to Note 5. Depreciable
Plant and Equipment for the estimated service lives of nonutility
property.
Note 7. Employee Benefit Plans
- -------------------------------
For the three months ended March 31, 2004, and 2003, SJW Corp.
recognized net periodic pension costs of $799,000 and $680,000,
respectively. The net periodic pension cost for the first
quarter of 2004 comprised of $438,000 in service costs, $762,000
in interest costs, $238,000 in others and the expected return on
assets of $639,000. In 2004, the Corporation expects to make
contributions of $2,800,000 to the pension plan and $297,000 to
the other post-retirement plan.
Note 8. Subsequent Events
- --------------------------
On April 29, 2004, SJW Corp.'s Board of Directors authorized a
stock repurchase program to repurchase up to 100,000 shares of
its outstanding common stock over the next thirty-six months.
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 SJW Corp. and 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:
- --------
SJW Corp. is a holding company with three subsidiaries.
San Jose Water Company, a wholly owned subsidiary of SJW Corp.,
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.
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 non-regulated water related services under agreements
with municipalities. These non-regulated services include full
water system operations, billings and cash remittance services.
SJW Land Company, a wholly owned subsidiary of SJW Corp., 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, other undeveloped land primarily in the San Jose
Metropolitan area, some properties in the states of Florida and
Connecticut, and a 70% limited partnership interest in 444 West
Santa Clara Street, L.P.
Crystal Choice Water Service LLC, a limited liability subsidiary
75% owned by SJW Corp., 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, which represents approximately 7% of its outstanding
shares as of December 31, 2003.
Critical Accounting Policies:
- -----------------------------
SJW Corp. has identified accounting policies below as the
policies critical to its 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 at the date of the financial statements, and revenues
and expenses during the reporting period. 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 Corporation's business operations is
discussed throughout "Management's Discussion and Analysis of
Financial Condition and Results of Operations" where such
policies affect the Corporation's reported and expected financial
results. The Corporation'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. The balancing account balance
varies with the seasonality of the water utility business such
that during the summer months when the demand for water is at its
peak, the balancing account tends to reflect an under-collection,
while during the winter months when demand for water is
relatively lower, the balancing account tends to reflect an over-
collection. Had the balancing account 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 over-collection, as the case may be, or
decreased by the amount of balancing account under-collection,
less applicable taxes. At March 31, 2004 and December 31, 2003,
the balancing account had a net over-collected balance as
follows:
March 31 December 31
2004 2003
-------- -----------
(in thousands)
Under-collection accrued prior to
November 29, 2001 $ 382 $ 382
Over-collection accrued from
November 30, 2001 to period end (502) (389)
------ ------
Net over-collected balance $(120) $ (7)
====== ======
Recognition of Non-regulated Revenue
SJW Corp. recognizes its non-regulated revenue based on the
nature of the non-regulated business activities. Revenue from
San Jose Water Company's non-regulated utility operations and
billing or maintenance agreements are recognized in accordance
with SEC Staff Accounting Bulletin 104, "Revenue Recognition",
when services have been rendered. Revenue from SJW Land Company
is recognized ratably over the term of the lease or when parking
services have been rendered. Revenue from Crystal Choice Water
Service LLC is recognized at the time of the delivery of water
conditioning and purification equipment or ratably over the term
of the lease of the water conditioning and purification
equipment.
Accrued Unbilled Revenue
San Jose Water Company reads the majority of its customers'
meters on a bi-monthly basis and records its revenue based on its
meter reading results. Additionally, revenue 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 San Jose Water 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
which the revision to San Jose Water Company's estimates are
determined. As of March 31, 2004 and December 31, 2003, accrued
unbilled revenue was $7,620,000 and $6,205,000, 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 judgment that it is probable that these costs will
be recoverable in the future revenue of San Jose Water 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. No
disallowance had to be recognized at March 31, 2004 and December
31, 2003. The net regulatory assets recorded by San Jose Water
Company as of March 31, 2004 and December 31, 2003 were
$8,065,000 and $7,976,000, respectively.
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, including the
evaluation of the treatment acceptable in the water utility
industry and its regulatory agency. These differences result in
deferred tax assets and liabilities, which are included within
the balance sheet. If actual results, due to changes in the
regulatory treatment, or significant changes in tax-related
estimates or assumptions or changes in law, differ materially
from these estimates, the provision for income taxes will 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 increases 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 December 31, 2003, the plan assets consist of
approximately 22% bonds, 11% cash and 67% equities. Furthermore,
equities are to be diversified by industry groups to balance for
capital appreciation and income. In addition, all investments
are publicly traded. San Jose Water Company uses an expected
rate of return on plan assets of 8% in its actuarial computation.
The distribution of assets is not considered highly volatile and
sensitive to changes in market rates and prices. 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 incurred
unrealized market losses in the three years prior to 2003.
Unrealized market losses on pension assets are amortized over 14
years for actuarial expense calculation purposes.
The Corporation 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, 2003, the composite discount rate used
was 6.25%.
Stock-Based Compensation Plans
SJW Corp. has a stockholder-approved long-term incentive plan
that allows granting of nonqualified stock options, performance
shares and dividend units. Under the plan, a total of 900,000
common shares are authorized for option awards and grants. The
Corporation has adopted Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation", utilizing the Black-Scholes option-pricing model
to compute the fair value of options at grant date as basis for
the stock-based compensation for financial reporting purposes.
The weighted-average assumptions utilized include: expected
dividend yield of 3.4%, expected volatility of 27%, risk-free
interest rate of 2.86%, expected holding period of five years.
In addition to the option grants, SJW Corp. has granted
restricted stock units to a key employee of the Corporation,
which were valued at market price at the date of grant. The
Corporation is correspondingly recognizing the fair market value
of the restricted stock granted as compensation expense, over the
vesting period of three years.
Additionally, restricted stock units granted to non-employee
Board members from the conversion of cash pension benefits were
valued at market price at the date of grant. The Corporation is
correspondingly recognizing the fair market value of the unvested
restricted stock granted as compensation expense, over the
vesting period of three years.
Consolidation Policy of Majority-Owned Enterprises
SJW Corp. consolidates its 75% controlling interest at Crystal
Choice Water Service in its financial statement with the 25%
minority interest included as "other" in the consolidated
Statements of Income and Comprehensive Income and in "other
noncurrent liabilities" in the Balance Sheet. Effective January
1, 2004, the Corporation adopted FASB Interpretation No (FIN)
46R, "Consolidation of Variable Interest Entities". As a result
of the adoption of FIN 46R, the Corporation has identified its
investment in 444 West Santa Clara Street, L. P. as a variable
interest entity and that SJW Land Company as the primary
beneficiary. SJW Land Company has consolidated its 70% limited
partnership interest in 444 West Santa Clara Street, L.P. in its
consolidated financial statements as of January 1, 2004 and
restated as of January 1, 2003.
Recent Accounting Pronouncements:
- --------------------------------
In January 2003, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 46, "Consolidation of Variable Interest
Entities", which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an
entity through means other than voting rights and accordingly
should consolidate the entity. In December 2003, FIN 46R was
issued to replace FASB Interpretation No. 46. The company will
be required to apply FIN 46R to variable interests in variable
interest entities (VIE or VIEs), created after December 31, 2003.
For variable interests in VIEs created before January 1, 2004,
the FIN 46R will be applied beginning on January 1, 2004. For
any VIEs that must be consolidated under FIN 46R that were
created before January 1, 2004, the assets, liabilities and non
controlling interests of the VIE initially would be measured at
their carrying amounts with any difference between the net amount
added to the balance sheet and any previously recognized interest
being recognized in the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable,
fair value at the date FIN 46R first applies may be used to
measure the assets, liabilities and non controlling interest of
the VIE. The adoption of FIN 46R has resulted in the
consolidation of the Corporation's 70% limited partnership
interest in 444 West Santa Clara Street L.P. as of Janaury 1,
2004 which had previously been accounted for under the equity
method of accounting.
In December 2003, the SEC issued Staff Accounting Bulletin No.
104 (SAB 104), "Revenue Recognition". SAB 104 supercedes SAB 101
(SAB 101), "Revenue Recognition in Financial Statements". The
primary purpose of SAB 104 is to rescind accounting guidance
contained in SAB 101 related to multiple element revenue
arrangements, superceded as a result of the issuance of Emerging
Issues Task Force (EITF) Issue No. 00-21, "Revenue Arrangements
with Multiple Deliverables". Additionally, SAB 104 rescinds the
SEC's "Revenue Recognition in Financial Statements Frequently
Asked Questions and Answers (the FAQ) issued with SAB 101 that
had been codified in SEC Topic 13, "Revenue Recognition".
Selected portions of the FAQ have been incorporated into SAB 104.
While the wording of SAB 104 has changed to reflect the issuance
of EITF 00-21, the revenue recognition principles of SAB 101
remain largely unchanged by the issuance of SAB 104. The
adoption of SAB 104 did not have a material impact on the
Corporation's financial position, results of operations or cash
flows.
Liquidity and Capital Resources:
- --------------------------------
San Jose Water Company's budgeted capital expenditures for 2004,
exclusive of capital expenditures financed by customer
contributions and advances, are $31,158,000 with capital
expenditures concentrated in water main replacements.
Approximately $12,000,000 will be spent to replace San Jose Water
Company's mains in 2004.
Starting in 1997, San Jose Water Company began a four-phased
Infrastructure Study establishing a systematic approach to
replace its utility infrastructure. Phase I and II of the
Infrastructure Study analyzed the company's pipes and mains.
Phase III and IV examined all other utility facilities. The
Infrastructure Study was completed in July 2002 and is being used
as a guide for future capital improvement programs and will serve
as the master plan for the company's future improvements.
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. The
company expects to incur approximately $176,000,000 in capital
expenditures, which includes replacement of pipes and mains, and
maintaining existing water systems, over the next five years,
exclusive of customer contributions and advances. The company's
actual capital expenditures may vary from its projections due to
changes in the expected demand for services, weather patterns,
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, 2004, SJW Corp.'s share of capital investment in
Crystal Choice Water Service LLC approximated 75%. SJW Corp.
does not expect to make significant cash contribution in Crystal
Choice Water Service LLC in 2004.
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.
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's financing activity is designed to
achieve a capital structure consistent with regulatory guidelines
of approximately 50% debt and 50% equity. As of March 31, 2004,
San Jose Water Company's funded debt and equity were 49.80% and
50.20%, respectively.
Company internally generated funds, which includes allowance for
depreciation and deferred income taxes, have provided
approximately 50% of the future cash requirements for San Jose
Water Company's capital expenditure. Due to its strong cash
position and low financial leverage condition, funding for its
future capital expenditure program will be provided primarily
through long-term debt. San Jose Water Company and its parent,
SJW Corp., do not anticipate the issuance of any common equity to
finance future capital expenditures.
San Jose Water Company has outstanding $130,000,000 of unsecured
senior notes as of March 31, 2004. 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, 2004, San Jose Water Company's funded
debt was 49.8% of total capitalization and the net income for
preceding twelve months was 373% of interest charges.
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 2.39%. Funds in the above amount will be used
for the retrofit of San Jose Water Company's water treatment
plant. As of March 31, 2004, the loan has not been funded.
San Jose Water Company will request the funding in 2004 when the
loan documentation and contract requirements are met.
In connection with the acquisition of two properties in the
states of Connecticut and Florida in April 2003, 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%. The loan
agreements generally restrict the company from prepayment in the
first five years and require submission of periodic financial
reports as part of the loan covenants. The properties were
leased to a multinational organization for a term of twenty
years.
The 444 West Santa Clara Street, L.P., in which SJW Land Company
owns a 70% limited partnership, has a mortgage loan in the
outstanding amount of $4,321,000 as of March 31, 2004. The
mortgage loan is due in April 2011 and amortized over twenty-five
years with a fixed interest rate of 7.80%. The mortgage loan is
secured by the partnership's real property and is non-recourse to
SJW Land Company.
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, 2004, SJW Corp. and its
subsidiaries had available unused short-term bank lines of credit
of $30,000,000. The lines of credit expire on July 1, 2005.
Results of Operations
- ---------------------
Overview
- --------
SJW Corp.'s consolidated net income for the three months ending
March 31, 2004 was $1,774,000, compared to $5,282,000 for the
same period in 2003. The decrease of $3,508,000 or 66% is
primarily attributed to an after-tax gain of $3,030,000 from the
sale of a SJW Land Company property recognized in the first
quarter of 2003.
Operating Revenue
- -----------------
Operating Revenue by Subsidiary
Three months
ended March 31,
2004 2003
------------------
(in thousands)
San Jose Water Company $29,659 $26,991
SJW Land Company 937 726
Crystal Choice Water Service 467 254
------- -------
$31,063 $27,971
======= =======
Operating revenue for the three months ended March 31, 2004 was
$31,063,000 compared to $27,971,000 for the same period in 2003,
representing an increase of $3,092,000, or 11%. San Jose Water
Company's revenue increased by $2,668,000 primarily due to the
cumulative rate increases of 7% and higher customer demand of 6%
as a result of warmer temperatures in March 2004.
SJW Land Company's lease revenue increased by $211,000 primarily
due to the addition of two commercial properties in March 2003 to
its portfolio. Crystal Choice Water Service LLC's revenue
increased $213,000 over 2003 due to an improved marketing
strategy.
The change in consolidated operating revenue was due to the
following factors:
Three months ended
March 31, 2004 vs. 2003
Increase/(decrease)
-----------------------
(in thousands)
Utility:
Consumption changes $ 875 3%
New customers increase 60 -
Rate increases 1,733 6%
Parking and lease 211 1%
Crystal Choice Water Service LLC 213 1%
------ ------
$3,092 11%
====== ======
Operating Expense
- -----------------
Operating Expense by Subsidiary
Three months
ended March 31,
2004 2003
------------------
(in thousands)
San Jose Water Company $25,951 $23,026
SJW Land Company 518 453
Crystal Choice Water Service 442 314
SJW Corp. 167 116
------- -------
$27,078 $23,909
======= ========
The change in operating expenses from the same period in 2003 was
due to the following factors:
Three months ended
March 31, 2004 vs. 2003
Increase/(decrease)
-----------------------
(in thousands)
Water production costs:
Decreased surface water supply $ 366 2%
Usage and new customers 534 2%
Pump tax and purchased water
price increase 872 4%
Energy prices (179) (1%)
----- ---
Total water production costs 1,593 7%
------ ---
Non-water production costs:
Administrative and general 540 2%
Other operating expense 163 1%
Maintenance 335 1%
Property taxes and other
non-income taxes 60 -
Depreciation and amortization 653 3%
------ ---
Total non water production costs 1,751 7%
------ ---
Income taxes (175) (1%)
------ ---
Total operating expense $3,169 13%
====== ===
Water production costs increased $1,593,000 or 18% for the first
quarter of 2004. The higher costs was primarily attributable to
increases of $872,000 in the cost of purchased water and pump
taxes from Santa Clara Valley Water District (SCVWD) as a result
of 10% rate increases in July 2003, $366,000 due to reduced
surface water availability and $534,000 due to higher customer
demand. The higher costs were offset by $179,000 due to lower
energy prices.
San Jose Water Company's water supply consists of groundwater
from wells, surface water from watershed run-off and diversion,
and imported water purchased from the SCVWD. Surface water is
the least expensive source of water and due to the reduced
surface water availability in the first quarter of 2004, the
water production costs increased by $366,000.
Water production for the three months ended March 31, 2004
decreased 328 million gallons from the same period in 2003.
During this period, the availability of surface water was
significantly lower than the same period in 2003.
The change in San Jose Water Company's source of supply mix was
as follows:
Three months ended
March 31, 2004 vs. 2003
Increase/(decrease)
-----------------------
(in million gallons)
Purchased water (141) (2%)
Groundwater 712 9%
Surface water (259) (3%)
Reclaimed water 16 -
---- ---
328 4%
==== ===
The changes in the source of supply mix were consistent with the
changes in the water production costs.
The non-water production costs, which include administrative,
other operating expense, maintenance, property taxes and other
non-income taxes, depreciation and amortization in the first
quarter of 2004, increased $1,751,000, or 13%, compared to the
same period in 2003. The increase in Administrative and General
expenses included $126,000 in pension costs primarily as a result
of the enhancement of pension plan benefits. Total salaries and
wages for administrative and general, other operating and
maintenance activities increased $673,000 in accordance with
bargaining unit wage escalation and new hires. Additionally,
depreciation expense increased $653,000 due to higher investment
in utility plants.
Income tax expense for the first quarter was $1,244,000 compared
to $1,419,000 for the same period in 2003, representing a
decrease of $175,000, or 12%, due to lower earnings in 2004. The
effective income tax rates for the periods ended March 31, 2004
and 2003 both approximated 41%.
The increase in interest expense for the first quarter of 2004
from the same period in 2003 was the result of higher interest
expenses due to the issuance of Series G senior notes and the
long-term debt associated with the commercial properties in
Connecticut and Florida.
The changes in comprehensive income for the three months ended
March 31, 2004 and 2003 were due to the increase in market value
of the investment in California Water Service Group.
Factors That May Affect Future Results
- --------------------------------------
Non-regulated 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 part of the proceedings, VTA has
transferred funds from the escrow account into a court deposit
account 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.
A trial is scheduled to be held in July, 2004. This transaction
will be recorded and is expected to result in an increase to net
income 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,
groundwater, watershed run-off and diversion, surface water and
by import water purchases from the SCVWD under the terms of a
master contract with SCVWD expiring in 2051. Groundwater level
in 2004 remains comparable to the 30-year normal level.
On April 21, 2004, the SCVWD's ten reservoirs were 62.8% full
with 106,146 acre-feet of water in storage. The rainfall in the
first three months of 2004 was approximately 88% of historical
season average.
Rainfall at San Jose Water Company's Lake Elsman was measured at
38.32 inches for the season of July 1, 2003 through April 1,
2004, which approximated the five-year average. Local surface
water is a less costly source of water and its availability
significantly impacts the results of operations.
Based on information provided by SCVWD in its Water Utility
Enterprise Report, 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.
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, exclusive of the years 2001 and 2002
expenditures. These improvements shall be incorporated into the
capital budgets to be completed by 2005. San Jose Water Company
is continuing implementation of security related to capital
improvements in 2004 and $860,000 is expected to be spent in
2004. Once completed, San Jose Water Company believes it will
have substantially reduced its vulnerability to terrorists'
attack. San Jose Water Company has and will continue to bear
costs associated with additional security precautions to protect
its water utility business and other operations. 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.
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. San Jose Water 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.
On May 23, 2003, San Jose Water Company filed a General Rate Case
application with the CPUC to increase rates by $25,793,000 or
18.2% in 2004, $5,434,000 or 3.2% in 2005, and $5,210,000 or 3.0%
in 2006. San Jose Water Company is seeking these proposed
increases to cover higher costs of providing water service,
including higher costs of power, purchased water, pump tax,
labor, security, water quality testing and reporting, and to
allow for necessary improvements to the water system. San Jose
Water Company is also requesting rate recovery of the current
balance of $71,000 in its Water Contamination Memorandum Account,
as well as recovery of an under-collection of $382,000 accrued in
its pre-November 29, 2001 Balancing Account. Finally, San Jose
Water Company is requesting a rate of return on equity of 11.5%
for the years 2004 through 2006. Effective January 1, 2004, the
CPUC allowed San Jose Water Company an interim rate increase of
approximately 2% as they have not reached a decision on the
General Rate Case application. A CPUC decision on the
application is anticipated in mid-2004.
Pursuant to Public Utilities Code Section 455.2, this allows for
revenue true-up from the time of the implementation of the
interim rates on January 1, 2004 to the time of the CPUC's
ultimate decision in the general 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.
Balancing Account Recovery Procedures
- -------------------------------------
On March 16, 2004 the California Public Utilities affirmed its
June 19, 2003 decision (D.03-06-072), in which the Commission
revised the existing procedures for recovery of under collections
and over collections in balancing accounts existing on or after
November 29, 2001 as follows: 1) If a utility is within its rate
case cycle and is not over earning, the utility shall recover its
balancing account subject to reasonableness review; and (2) If a
utility is either within or outside of its rate case cycle and is
over earning, the over earnings will be used as a measure by
which recovery of offset expenses in the balancing account will
be reduced. For example, if the amount of the over earning is
equal to or exceeds the amount of offset expenses to be recovered
in the balancing account, those expenses shall be reduced to
zero. Any offset expenses accumulated in the balancing account
would be amortized below the line and any offset revenues
collected in the balancing account would be returned to
ratepayers. Utilities shall use the recorded rate of return
means test to evaluate earnings for all years. The expenses used
in this earnings test shall be adjusted for any "extraordinary"
expenses and revenue shall be adjusted for any "extraordinary"
revenue. The earnings test will use recorded rate base.
Utilities must file for recovery of the balancing account
balances before March 31 of every year.
As mentioned above in the general rate case, filed in May 2003,
San Jose Water Company has requested recovery of an under-
collection of $382,000 accrued in pre-November 29, 2001 Balancing
Account via a customer surcharge. Subsequently, on September 9,
2003, San Jose Water Company filed a compliance filing requesting
Commission review of the balancing account over-collected balance
of $111,000, accrued between November 29, 2001 and December 31,
2002. As this amount is immaterial as compared to overall
revenue, rather than being refunded, San Jose Water Company
proposed that this balance be carried forward to the next review
period scheduled for March 2004. As of March 31, 2004, the
Commission has yet to dispose of this filing. On March 30, 2004,
San Jose Water Company filed a compliance filing requesting
Commission review of the balancing account over-collected balance
of $272,000, accrued between January 1, 2003 and December 31,
2003. As this amount is immaterial as compared to overall
revenue, rather than being refunded, San Jose Water Company
proposed that this balance be carried forward to the next review
period scheduled for March 2005. The total ending balancing
account balance as of March 31, 2004, including all the
outstanding balances currently pending before the Commission, is
a net over-collection of $120,000.
At March 31, 2004 and December 31, 2003, the balancing account
had a net over-collected balance as follows:
March 31 December 31
2004 2003
-------- -----------
(in thousands)
Under-collection accrued prior to
November 29, 2001 $ 382 $ 382
Over-collection accrued from
November 30, 2001 to period end (502) (383)
------ ------
Net over-collected balance $(120) $ (1)
====== ======
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.
SJW Corp. 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) The Corporation's management, with the participation of
the Corporation's Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the
Corporation's disclosure controls and procedures as of
the end of the period covered by this report. Based on
that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Corporation's
disclosure controls and procedures (as defined in Rules
13(a)-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934) as of the end of the period covered by
this report have been designed and are functioning
effectively to provide reasonable assurance that the
information required to be disclosed by the Corporation
in reports filed under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and
Exchange Commission's rules and forms. The Corporation
believes that a control system, no matter how well
designed and operated, cannot provide absolute
assurance that the objectives of the control system are
met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of
fraud, if any, within a company have been detected.
(b) Changes in internal controls. There has been no change
in internal control over financial reporting during the
first fiscal quarter of 2004 that has materially
affected, or is reasonably likely to materially affect
the internal controls over financial reporting of SJW
Corp.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SJW Corp. is subject to ordinary routine litigation incidental to
its business. Other than as disclosed regarding the eminent
domain proceeding in "Nonregulated Operations" under Item 2,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations", there are no other pending legal
proceedings to which the Corporation or any of its subsidiaries
is a party, or to which any of its properties is the subject,
that are expected to have a material effect on the Corporation's
financial position, results of operations or cash flows.
ITEM 5. OTHER INFORMATION
On April 29, 2004, the Board of Directors of the SJW Corp.
declared the regular quarterly dividend of $.255 per common
share. The dividend will be paid June 1, 2004, to shareholders
of record as of the close of business on May 12, 2004.
In accordance with Section 10A(i)(2) of the Securities Exchange
Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of
2002, SJW Corp. is responsible for disclosing the non-audit
services approved by SJW Corp.'s Audit Committee to be performed
by KPMG LLP, SJW Corp.'s independent auditor. Non-audit services
are defined in the law as services other than those provided in
connection with an audit or a review of the financial statements
of SJW Corp. The non-audit services approved by the Audit
Committee in the first quarter of 2004 are considered by SJW
Corp. to be audit-related services that closely relate to the
financial audit process. Each of the services has been approved
in accordance with a pre-approval from the Audit Committee's
Chairman pursuant to delegated authority by the Audit Committee.
During the quarterly period covered by this filing, the Audit
Committee approved additional engagements of KPMG LLP for the
following non-audit service: tax return preparation, non-audit
accounting services, and tax matter consultations concerning
federal and state taxes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits required to be filed by Item 601 of Regulation
S-K.
See Exhibit Index located immediately following the
Certification of this document, which is incorporated
herein by reference as required to be filed by Item 601
of Regulation S-K for the quarter ended on March 31,
2004.
(b.) Reports on Form 8-K.
SJW Corp. filed a current report on Form 8-K with the
Securities and Exchange Commission on February 2, 2004
to furnish its press release that announced the
financial results for the fourth quarter ended December
31, 2003 under Item 12 thereof, and its press release
that announced its increase of common stock dividend
and three-for-one stock split under Item 5 thereof.
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 7, 2004 By /s/ Angela Yip
----------------
ANGELA YIP
Chief Financial Officer and Treasurer
Senior Vice President - Finance
EXHIBIT INDEX
-------------
Exhibit
No. Description of Document
- ------- -----------------------
10.27 First Amendment dated March 1, 2004 and adopted on March
2, 2004 by the San Jose Water Company Board of Directors
to the Restated Executive Supplemental Retirement Plan
dated May 1, 2003. (1)(2)
31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a) by
President and Chief Executive Officer. (1)
31.2 Certification Pursuant to Rule 13a-14(a)/15d-14(a) by
Chief Financial Officer and Treasurer. (1)
32.1 Certification Pursuant to 18 U.S.C. Section 1350 by
President and Chief Executive Officer, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (1)
32.2 Certification Pursuant to 18 U.S.C. Section 1350 by Chief
Financial Officer and Treasurer, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (1)
(1) Filed currently herewith.
(2) Management contract or compensatory plan or
agreement.
Exhibit 10.27
FIRST AMENDMENT TO
SAN JOSE WATER COMPANY
EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN
(Restated May 1, 2003)
The San Jose Water Co. Executive Supplemental Retirement Plan is
hereby amended effective March 1, 2004 to read as follows:
Exhibit A to the Executive Supplemental Retirement Plan is
amended to add paragraph (f)
(f) If Jim Johansson retires March 12, 2004 then the
benefit to which he is entitled under Section 3.1 and 3.2 of the
Plan shall be calculated with an additional one and one half
years of service credit and one and one half
Exhibit 31.1
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 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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 report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of on annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies and material weakness in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: May 7, 2004
/s/ W. Richard Roth
------------------------------------
W. RICHARD ROTH
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION
I, Angela Yip, Senior Vice President - Finance, 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 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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 report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of on annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies and material weakness in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: May 7, 2004
/s/ ANGELA YIP
------------------------------------
Angela Yip
Chief Financial Officer and Treasurer
Senior Vice President - Finance
(Principal Financial Officer)
Exhibit 32.1
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,
2004 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
(Principal Executive Officer)
May 7, 2004
Exhibit 32.2
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-K for the quarterly period ended March 31,
2004 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
Senior Vice President - Finance
(Principal Financial Officer)
May 7, 2004
36