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 June 30, 2004
- ----------------------------------------------------------------
Commission file number 1-8966
- ----------------------------------------------------------------
SJW Corp.
- ----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 77-0066628
- ----------------------------------------------------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
374 West Santa Clara Street, San Jose, CA 95196
- ----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
408-279-7800
- ----------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- ----------------------------------------------------------------
(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 this report are
9,138,841.
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 SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
2004 2003 2004 2003
(Restated (Restated
see Note 3) see Note 3)
--------------------------------------
OPERATING REVENUE $45,609 38,149 $76,672 66,120
OPERATING EXPENSES
Operation:
Purchased water 11,666 8,873 18,176 14,920
Power 1,597 1,376 2,411 2,113
Pump taxes 5,902 4,201 9,023 6,269
Administrative and
general 4,484 4,183 8,794 7,953
Other 3,287 3,205 6,536 6,291
Maintenance 2,179 1,903 4,287 3,676
Property taxes and other
nonincome taxes 1,325 1,222 2,654 2,491
Depreciation and
Amortization 4,707 3,825 9,100 7,565
Income taxes 3,352 3,053 4,596 4,472
--------------------------------------
Total operating expenses 38,499 31,841 65,577 55,750
--------------------------------------
OPERATING INCOME 7,110 6,308 11,095 10,370
Gain on sale of nonutility
property, net of income
taxes of $2,105 - - - 3,030
Interest on long-term debt (2,382) (2,106) (4,764) (4,192)
Dividend income 310 310 621 619
Other, net (231) (86) (371) (119)
--------------------------------------
NET INCOME $ 4,807 4,426 $ 6,581 9,708
======================================
Other comprehensive
income (loss):
Unrealized income (loss)
on investment (815) 2,606 164 4,916
Income taxes 334 (1,068) (67) (2,015)
---------------------------------------
Other comprehensive income
loss), net (481) 1,538 97 2,901
---------------------------------------
COMPREHENSIVE INCOME $ 4,326 5,964 $ 6,678 12,609
=======================================
EARNINGS PER SHARE
Basic $ 0.53 0.48 $ 0.72 1.06
Diluted $ 0.53 0.48 $ 0.72 1.06
=======================================
COMPREHENSIVE INCOME PER
SHARE
Basic $ 0.47 0.65 $ 0.73 1.38
Diluted $ 0.47 0.65 $ 0.73 1.38
======================================
DIVIDENDS PER SHARE $ 0.26 0.25 $ 0.51 0.49
======================================
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic 9,138,841 9,135,441 9,136,758 9,135,441
Diluted 9,193,895 9,135,441 9,191,077 9,135,441
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
JUNE 30 DECEMBER 31
2004 2003
(Restated
see Note 3)
ASSETS ------------------------
UTILITY PLANT:
Land $ 1,735 $ 1,750
Depreciable plant and equipment 585,932 570,119
Construction in progress 8,070 4,000
Intangible assets 7,840 7,840
------------------------
Total utility plant 603,577 583,709
Less accumulated depreciation and
amortization 184,074 174,985
------------------------
Net utility plant 419,503 408,724
NONUTILITY PROPERTY 35,313 34,918
Less accumulated depreciation 2,818 2,349
------------------------
Net nonutility property 32,495 32,569
CURRENT ASSETS:
Cash and equivalents 5,270 10,278
Accounts receivable and accrued
unbilled utility revenue 22,492 15,043
Prepaid expenses and other 1,918 2,019
------------------------
Total current assets 29,680 27,340
OTHER ASSETS:
Investment in California Water
Service Group 30,304 30,139
Unamortized debt issuance and
reacquisition costs 3,372 3,447
Regulatory assets 8,337 7,976
Other 5,787 6,049
----------------------
Total other assets 47,800 47,611
----------------------
$529,478 $516,244
======================
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common stock $ 9,520 $ 9,516
Additional paid-in capital 13,846 13,375
Retained earnings 140,040 138,058
Accumulated other comprehensive income 5,516 5,419
----------------------
Total shareholders' equity 168,922 166,368
Long-term debt, less current portion 143,917 143,947
----------------------
Total capitalization 312,839 310,315
CURRENT LIABILITIES:
Current portion of long-term debt 93 184
Accrued pump taxes and purchased water 6,672 3,224
Purchased power 1,462 864
Accounts payable 5,368 2,217
Accrued interest 3,619 3,619
Accrued taxes 2,092 467
Other current liabilities 4,501 4,501
----------------------
Total current liabilities 23,807 15,076
DEFERRED INCOME TAXES 40,767 38,207
ADVANCES FOR AND CONSTRIBUTIONS
IN AID OF CONSTRUCTION 141,567 141,122
OTHER NONCURRENT LIABILITIES 10,498 11,524
----------------------
$529,478 $516,244
======================
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
SIX MONTHS ENDED
JUNE 30
2004 2003
(Restated
see note 3)
----------------------
OPERATING ACTIVITIES:
Net income $ 6,581 $ 9,708
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 9,100 7,565
Deferred income taxes 2,560 4,561
Stock-based compensation 581 18
Gain on sale of nonutility
property, net of taxes - (3,030)
Changes in operating assets and
liabilities:
Accounts receivable and accrued
unbilled utility revenue (7,449) (4,308)
Accounts payable, purchased power
and other current liabilities 3,749 5,538
Accrued pump taxes and
purchased water 3,448 3,089
Accrued taxes 1,625 2,490
Other noncurrent assets and
noncurrent liabilities (1,438) (1,466)
Other changes, net 624 5
---------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 19,381 24,170
---------------------
INVESTING ACTIVITIES:
Additions to utility plant (20,538) (22,260)
Additions to nonutility property (265) (15,612)
Cost to retire utility plant, net of
salvage (158) (260)
Proceeds from sale of nonutility
property - 5,370
---------------------
NET CASH USED IN INVESTING ACTIVITIES (20,961) (32,762)
---------------------
FINANCING ACTIVITIES:
Repayments for line of credit,
net of borrowings - (5,150)
Long-term borrowings, net of repayments (121) 9,852
Stock issuance and buyback (33) -
Dividends paid (4,599) (4,429)
Receipts of advances and contributions
in aid of construction 2,262 8,594
Refunds of advances for construction (937) (751)
----------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (3,428) 8,116
----------------------
NET CHANGE IN CASH AND EQUIVALENTS (5,008) (476)
----------------------
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 10,278 581
----------------------
CASH AND EQUIVALENTS, END OF PERIOD $ 5,270 $ 105
----------------------
Cash paid during the period for:
Interest $ 5,084 $ 4,244
Income taxes (14) 650
See accompanying Notes to Unaudited Condensed Consolidated
Financial Statements.
SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 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 June 30, 2004 and 2003, the basic
weighted average number of common shares was 9,138,841 and
9,135,441, respectively. For the six months ended June 30, 2004
and 2003, the basic weighted average number of common shares was
9,136,758 and 9,135,441, respectively. For the three and six
month periods ended June 30, 2004, the diluted weighted average
number of common shares outstanding was 9,193,895 and 9,191,077,
respectively. The diluted weighted average number of common
shares was 9,135,441 for both three and six month periods ending
June 30, 2003. There were no common stock equivalents during the
three and six-month periods ended June 30, 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.
Note 2. Long-Term Incentive Plan
- ---------------------------------
The Corporation has reserved 900,000 common shares for issuance
under the Long-Term Incentive Plan (Incentive Plan). As of June
30, 2004, 4,295 shares have been issued pursuant to the Incentive
Plan, and 154,189 shares are issuable upon the exercise of
outstanding options and deferred restricted stock. The remaining
shares available for issuance under the Incentive Plan are
741,516. The total compensation cost charged to income under the
Incentive Plan was $290,000 and $581,000 for the three and six
months ended June 30, 2004, respectively. The total benefit,
including non-employee directors' converted post-retirement
benefits, recorded in shareholders' equity under the Incentive
Plan was $556,000, and $26,000 related to dividend equivalent
units was accrued as a liability as of June 30, 2004.
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.
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, options to purchase 26,076 common shares
at an exercise price of $29.70 per share were issued, and the
weighted average fair value was $5.33 per share, at the date of
grant. As of June 30, 2004, options to purchase 55,183 common
shares were issued and 266 common shares were issued upon
exercise of options. Shares subject to outstanding options under
the Incentive Plan were 54,919.
For the three and six months ended June 30, 2004, the Corporation
has recognized stock compensation expense of $32,000 and $65,000,
respectively, for the stock options granted to its executives.
Deferred Restricted Stock Plans
As of June 30, 2004, restricted stock units for 41,670 shares
have been granted to a key employee of the Corporation. For the
three and six months ended June 30, 2004, the Corporation has
recognized stock compensation expense of $128,000 and $256,000,
respectively, related to these restricted stock units.
As of June 30, 2004, restricted stock units for 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. As of June 30, 2004, 4,029 shares were issued pursuant
to restricted stock units to a retired non-employee Board member.
In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation", the Corporation has recognized stock compensation
expense of $102,000 and $204,000 for the three and six months
ended June 30, 2004, respectively, related to restricted stock
units under the Deferred Restricted Stock Program.
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 June 30,
2004, the Corporation has granted restricted stock units for
4,920 shares in lieu of cash retainer fees. For the three and
six months ended June 30, 2004, the Corporation has recognized
stock compensation expense of $29,000 and $57,000, respectively,
related to restricted stock units issued to non-employee Board
members in connection with their annual retainers.
Dividend Equivalent Rights
SJW Corp. also has a Dividend Equivalent Rights Agreement
providing holders of options and restricted stock units to
receive dividend rights each time a dividend is paid on common
shares after the grant date. Stock compensation expenses is
measured and recognized on dividend equivalent rights on the date
they are granted. The above reported stock compensation expenses
on stock options and restricted stock units includes the stock
compensation expenses recognized on the dividend equivalent
rights.
Note 3. Partnership Interest Restatement
- -----------------------------------------
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 interest 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 June 30, 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
Total current assets 27,098 27,340
Investment in affiliate 1,110 -
Other assets 5,594 6,049
Total other assets 48,266 47,611
Total assets 511,717 516,244
Liabilities:
Long-term debt $139,614 $143,947
Total capitalization 305,982 310,315
Other noncurrent liabilities 11,330 11,524
Total capitalization & liabilities 511,717 516,244
Three Months Ended June 30, 2003
As As
Previously Reported Restated
------------------- --------
(in thousands)
Consolidated Statements of Income
and Comprehensive Income:
Operating revenue $ 37,968 $ 38,149
Total operating expense 31,712 31,841
Operating income 6,256 6,308
Other, net (33) (86)
Net income 4,426 4,426
Comprehensive income 5,964 5,964
Six Months Ended June 30, 2003
As As
Previously Reported Restated
------------------- --------
(in thousands)
Consolidated Statements of Income
and Comprehensive Income:
Operating revenue $ 65,759 $ 66,120
Total operating expense 55,527 55,750
Operating income 10,232 10,370
Other, net 19 (119)
Net income 9,708 9,708
Comprehensive income 12,609 12,609
There was no cumulative impact on retained earnings that resulted
from the adoption of Interpretation No. 46(R).
The Partnership has an outstanding mortgage loan in the amount of
$4,302,000 as of June 30, 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) that 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 regulated and non-regulated business activities
for the three and six months ended June 30, 2004 and 2003:
Three Months Ended Three Months Ended
June 30, 2004 June 30, 2003
------------------------- -------------------------
(in thousands)
Non- Non-
Regulated regulated Total Regulated regulated Total
--------- --------- ----- --------- --------- -----
Revenue $43,063 $2,546 $45,609 $36,276 $1,873 $38,149
Expenses 36,426 2,073 38,499 30,037 1,804 31,841
------- ------ ------- ------- ------ -------
Operating
Income $ 6,637 $ 473 $ 7,110 $ 6,239 $ 69 $ 6,308
======= ====== ======= ======= ====== =======
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
------------------------- -------------------------
(in thousands)
Non- Non-
Regulated regulated Total Regulated regulated Total
--------- --------- ----- --------- --------- -----
Revenue $72,114 $4,558 $76,672 $62,683 $3,437 $66,120
Expenses 62,036 3,541 65,577 52,738 3,012 55,750
------- ------ ------- ------- ------ -------
Operating
Income $10,078 $1,017 $11,095 $ 9,945 $ 425 $10,370
======= ====== ======= ======= ====== =======
Note 5. Depreciable Plant and Equipment
- ----------------------------------------
The major components of depreciable plant and equipment as of
June 30, 2004 and December 31, 2003 are as follows:
June 30, December 31,
2004 2003
-------- ------------
(in thousands)
Equipment $ 47,667 $ 49,071
Transmission and distribution 462,176 455,030
Office building and other structures 76,089 66,018
-------- --------
Total $585,932 $570,119
======== ========
Depreciation of depreciable plant and equipment 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
Office buildings and other structures 7 to 50 years
Note 6. Nonutility Property
- ----------------------------
The major components of net nonutility property as of June 30,
2004 and December 31, 2003 are as follows:
June 30, December 31,
2004 2003
-------- -----------
(in thousands)
Land $ 9,917 $ 9,485
Buildings and improvements 25,165 25,202
Intangibles 231 231
Less: accumulated depreciation and
amortization 2,818 2,349
-------- -------
Total $ 32,495 $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
- -------------------------------
The components of net periodic benefit costs for SJW Corp.'s
pension plan and Supplemental Executive Retirement Plan for the
three and six months ended June 30, 2004 and 2003 are as follows:
Three months Six months
ended June 30 ended June 30
2004 2003 2004 2003
------------------------------------
(in thousands)
Service cost $ 438 354 $ 876 708
Interest cost 762 685 1,524 1,370
Other cost 238 189 476 378
Expected return on
Assets (639) (548) (1,278) (1,096)
----- ---- ------- -----
$ 799 680 $ 1,598 1,360
===== ==== ======= =====
In June 2004, the Corporation made a contribution of $2,300,000
to the pension plan and expects to contribute $297,000 to its
other post-retirement plan in 2004.
Note 8. Stock Repurchase
- -------------------------
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.
On May 28, 2004, SJW Corp. repurchased 895 shares of its
outstanding common stock at the prevailing price in the open
market at an aggregate cost of $29,000. All repurchased shares
have been cancelled and are considered authorized and unissued.
Note 9. Segment Reporting
- --------------------------
SJW Corp. is a holding company with three subsidiaries: San Jose
Water Company (SJWC), a water utility operation with both
regulated and nonregulated businesses, SJW Land Company (SJW
Land), which operates parking facilities and commercial building
rentals, and Crystal Choice Water Service LLC (CCWS), a business
providing the sale and rental of water conditioning and
purification equipment. In accordance with Statement of
Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information, SJW Corp. has
determined that it has one reportable business segment, that of
providing water utility and utility-related services to its
customers. These services are provided through the Corporation's
subsidiary, SJWC.
The Corporation's reportable segment has been determined based on
information used by the chief operating decision maker. SJW
Corp.'s chief operating decision maker is its President and Chief
Executive Officer (CEO). The CEO reviews financial information
presented on a consolidated basis that is accompanied by
disaggregated information about operating revenue, net income
(loss) and total assets.
The tables below set forth information relating to SJW Corp.'s
reportable segment. Certain allocated assets, revenue and
expenses have been included in the reportable segment amounts.
Other business activity from the Corporation not included in the
reportable segment is included in the "All Other" category.
For three months ended June 30, 2004
(in thousands)
---------------------------------------
All SJW
SJWC Other* Corp.
------------ ---------- -----------
Operating revenue $ 44,181 $ 1,428 $ 45,609
Operating expense $ 37,434 $ 1,065 $ 38,499
Net income $ 4,460 $ 347 $ 4,807
Depreciation and
amortization $ 4,513 $ 194 $ 4,707
Interest on long-term
debt $ 2,382 - $ 2,382
Total assets $463,535 $65,943 $529,478
For three months ended June 30, 2003
(in thousands)
---------------------------------------
All SJW
SJWC Other* Corp.
------------ ---------- -----------
Operating revenue $ 37,075 $ 1,074 $ 38,149
Operating expense $ 30,780 $ 1,061 $ 31,841
Net income $ 4,194 $ 232 $ 4,426
Depreciation and
amortization $ 3,678 $ 147 $ 3,825
Interest on long-term
debt $ 2,106 - $ 2,106
Total assets $430,704 $66,136 $496,840
For six months ended June 30, 2004
(in thousands)
---------------------------------------
All SJW
SJWC Other* Corp.
------------ ---------- -----------
Operating revenue $ 73,840 $ 2,832 $ 76,672
Operating expense $ 63,385 $ 2,192 $ 65,577
Net income $ 5,877 $ 704 $ 6,581
Depreciation and
amortization $ 8,758 $ 342 $ 9,100
Interest on long-term
debt $ 4,764 - $ 4,764
Total assets $463,535 $65,943 $529,478
For six months ended June 30, 2003
(in thousands)
---------------------------------------
All SJW
SJWC Other* Corp.
------------ ---------- -----------
Operating revenue $ 64,066 $ 2,054 $ 66,120
Operating expense $ 53,806 $ 1,944 $ 55,750
Net income $ 8,665 $ 1,043 $ 9,708
Depreciation and
amortization $ 7,358 $ 207 $ 7,565
Interest on long-term
debt $ 4,192 - $ 4,192
Total assets $430,704 $66,136 $496,840
* The "All Other" category includes SJW Land, CCWS and the
holding company. Please refer to Results of Operation under Item
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for revenue from SJW Land and CCWS
activity. The holding company does not engage in revenue
generating activity.
Note 10. Commitments
- ---------------------
SJW Corp.'s contractual obligations and commitments include
senior notes, mortgages and other obligations. San Jose Water
Company, a subsidiary of SJW Corp., has received advance deposit
payments from its customers on construction projects. Refunds of
the advance deposit payments constitute SJW Corp.'s commitments.
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 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 the 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 balance of the balancing
account 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, or decreased by the amount of
balancing account under-collection, less applicable taxes, as the
case may be. At June 30, 2004 and December 31, 2003, the
balancing account had a net balance as follows:
June 30 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 (91) (389)
------ -------
Net under/(over)-collected balance $ 291 $ (7)
====== ======
Revenue Recognition
San Jose Water Company's revenue from metered customers includes
billings to customer based on meter readings plus an estimate of
water used between the customers' last meter reading and the end
of the accounting period. The company reads the majority of its
customers' meters on a bi-monthly basis and records its revenue
based on its meter reading results. 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 adjusting the operating revenue in the period
which the revision to San Jose Water Company's estimates are
determined. As of June 30, 2004 and December 31, 2003, accrued
unbilled revenue was $13,071,000 and $6,205,000, respectively.
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 has 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.
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 the 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 the
future for ratemaking purposes, including the deferred regulatory
assets, would require San Jose Water Company to immediately
recognize the regulatory asset as a cost for financial reporting
purposes. No disallowance had to be recognized at June 30, 2004
and December 31, 2003. The net regulatory assets recorded by San
Jose Water Company as of June 30, 2004 and December 31, 2003 was
$8,337,000 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 in the
balance sheet. If actual results, due to changes in 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 risk related to foreign exchange fluctuation has been
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, restricted stock units and dividend units. Under the
plan, a total of 900,000 common shares are authorized for 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 was 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 Corp. has consolidated 444 West Santa Clara
Street, L.P. in its consolidated financial statements as of
January 1, 2004 and restated its prior periods financial
statements to reflect the consolidation on a comparative basis.
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. For any variable
interest entities (VIE or 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
are 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
January 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.
In May 2004, the FASB issued FASB Staff Position (FSP) No. 106-2,
"Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003".
The major provision under FSP No. 106-2 would require employers
that qualify for a prescription-drug subsidy under Medicare
legislation enacted in December 2003 to recognize the reduction
in costs as employees provide services in future years. The FSP
No. 106-2 also explains how to account for the effect of the
law's federal benefit to retirees on per capita claims costs, the
relevant accounting for income taxes, and required disclosures.
The adoption of the FSP No. 106-2 has not had an impact on the
Corporation's financial position, results of operations or cash
flows due to cost savings are passed through to the retirees.
In June 2004, the SEC issued Emerging Issues Task Force (EITF)
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments" for investments
accounted for under FASB No. 115, "Accounting in Certain
Investments in Debt and Equity Securities", and FASB No. 124,
"Accounting for Certain Investments Held by Not-for-Profit
Organizations, effective June 15, 2004. The adoption of the EITF
Issue No. 03-1 will 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. It will also
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 June 30, 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 contributions to 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 June 30, 2004,
San Jose Water Company's funded debt and equity were 49.20% and
50.80%, 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 June 30, 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 June 30, 2004, San Jose Water Company's funded
debt was 49.2% of total capitalization and the net income for
preceding twelve months was 371% 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 June 30, 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% and are
secured by the two properties in the states of Connecticut and
Florida. 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 interest, has a mortgage loan in
the outstanding amount of $4,321,000 as of June 30, 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 June 30, 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 ended
June 30, 2004 was $4,807,000, an increase of $381,000 or 9% from
$4,426,000 in the second quarter of 2003. Six months earnings was
$6,581,000, a decrease of $3,127,000 or 32% from $9,708,000 for
the same period in 2003. The six months earnings decrease was
primarily due 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 Six months ended
June 30 June 30
2004 2003 2004 2003
(Restated) (Restated)
--------------------------------------
(in thousands)
San Jose Water Company $44,181 $37,075 $73,840 $64,066
SJW Land Company 990 723 1,927 1,449
Crystal Choice Water
Service 438 351 905 605
----------------- -----------------
$45,609 $38,149 $76,672 $66,120
================= =================
Operating revenue for the second quarter was $45,609,000 versus
$38,149,000 for the same period in 2003, representing an increase
of $7,460,000 or 20%. Approximately $4,571,000 of the total
revenue was attributable to higher customer demand, which
increased revenue by 12% as a result of warmer temperatures in
April and May, 2004 and $2,535,000 increase was due to cumulative
rate increases totaling 7%.
For the six months ended June 30, 2004, the increase of
$10,552,000 or 16% in operating revenue from the same period in
2003, was primarily due to the reasons as explained above.
SJW Land Company's lease revenue increased by $267,000 and
$478,000 for the second quarter and six months ended June 30,
2004, respectively, was primarily due to the addition of two
commercial properties in March 2003 to its portfolio.
Crystal Choice Water Service LLC's revenue increased by $87,000
and $300,000 for the second quarter and six months ended June 30,
2004, respectively, over 2003 due to an improved marketing
strategy.
The change in consolidated operating revenue was due to the
following factors:
Three months ended Six months ended
June 30 2004 vs. 2003 June 30 2004 vs. 2003
Increase/(decrease) Increase/(decrease)
------------------------------------------
Utility: (in thousands)
Consumption changes $ 4,470 12% $ 5,345 8%
New customers increase 101 - 161 -
Rate increases 2,535 7% 4,268 6%
Parking and rental 267 1% 478 1%
Crystal Choice Water
Service 87 - 300 1%
--------------- ---------------
$ 7,460 20% $ 10,552 16%
=============== ===============
Operating Expenses
- ------------------
Operating Expenses by Subsidiary
Three months ended Six months ended
June 30 June 30
2004 2003 2004 2003
(Restated) (Restated)
------------------------------------------
(in thousands)
San Jose Water Company $37,434 30,780 $63,385 53,806
SJW Land Company 459 537 977 990
Crystal Choice Water
Service 439 371 881 685
SJW Corp. 167 153 334 269
----------------- ----------------
$38,499 31,841 $65,577 55,750
================ ================
The change in operating expenses from the same period in 2003 was
due to the following factors:
Three months ended Six months ended
June 30 2004 vs. 2003 June 30 2004 vs. 2003
Increase/(decrease) Increase/(decrease)
--------------------------------------------
(in thousands)
Water production costs:
Decreased surface
water supply $ 411 1% $ 777 1%
Usage and new
customers 3,041 10% 3,575 6%
Pump tax and purchased
water price increase 1,414 4% 2,286 4%
Energy prices (151) - (330) -
------------- --------------
Total water production
costs 4,715 15% 6,308 11%
------------- --------------
Non-water production costs:
Administrative and
general 301 1% 841 2%
Other operating expense 82 - 245 1%
Maintenance 276 1% 611 1%
Property taxes and other
non-income taxes 103 - 163 -
Depreciation and
amortization 882 3% 1,535 3%
------------- -------------
Total non-water
production costs 1,644 5% 3,395 7%
------------- -------------
Income taxes 299 1% 124 -
------------- -------------
Total operating expenses $6,658 21% $9,827 18%
============= =============
Water production costs increased $4,715,000 or 15% of total costs
and expensesfor the second quarter of 2004. The higher costs was
primarily attributable to increases of $1,263,000 in the cost of
purchased water and pump taxes from Santa Clara Valley Water
District (SCVWD) offset by lower energy prices, $411,000 due to
reduced surface water availability and $3,041,000 due to higher
customer demand.
For the six months ended June 30, 2004, the increase of
$6,308,000 in total water production costs from the same period
in 2003 was due to the reasons as explained above.
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 decreased
surface water availability in the second quarter of 2004, the
water production costs increased by $411,000.
Water production for the three months and six months ended June
30, 2004 increased 2,205 million gallons and 2,533 million
gallons from the same period in 2003. During these periods, the
availability of surface water was significantly lower than the
same periods in 2003.
The change in San Jose Water Company's source of supply mix was
as follows:
Three months ended Six months ended
June 30 2004 vs. 2003 June 30 2004 vs. 2003
Increase/(decrease) Increase/(decrease)
--------------------------------------------
(in million gallons)
Purchased water 1,329 6% 1,188 6%
Ground water (291) (1%) (550) (3%)
Surface water 1,103 5% 1,815 9%
Reclaimed water 64 - 80 -
--------------- ---------------
2,205 10% 2,533 12%
=============== ===============
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 second
quarter of 2004, increased $1,644,000 compared to the same period
in 2003. The increase in Administrative and General expenses
included $168,000 in pension costs primarily as a result of the
enhancement of pension plan benefits. Depreciation expense
increased $882,000 due to higher investment in utility plants.
Other increases include $209,000 in legal and professional fees,
$124,000 in insurance and related costs, $202,000 in contracted
work related to various projects and $59,000 in other costs.
For the six months ended June 30, 2004, the non-water production
costs increased by $3,395,000 over the same period in 2003. The
increase in Administrative and General expenses included $294,000
in pension costs primarily as a result of the enhancement of
pension plan benefits. Depreciation expense increased $1,535,000
due to higher investment in utility plants. Other increases
include $194,000 in legal and professional fees, $200,000 in
insurance and related costs, $128,000 in contracted work related
to various projects, $754,000 in wages, salaries and stock
compensation, and $290,000 in other costs.
Income tax expense for the second quarter and six months ended
June 30, 2004 increased by $299,000 and $124,000, respectively,
over the same periods in 2003 due to higher earnings in 2004.
The effective income tax rates for the periods ended June 30,
2004 and 2003 both approximated 41%.
The increase in interest expense for the second quarter and six
months ended June 30, 2004 from the same periods 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 and six
months ended June 30, 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
was 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 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 was held on July 21, 2004. No judgment was made and the
trial was rescheduled to October 25, 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 July 14, 2004, the SCVWD's ten reservoirs were 55.35% full
with 93,497 acre-feet of water in storage. The rainfall in the
first six months of 2004 was approximately 81% of historical
season average.
Rainfall at San Jose Water Company's Lake Elsman was measured at
39.07 inches for the season of July 1, 2003 through June 30,
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 to 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
California Public Utilities Commission (CPUC). The CPUC sets
rates that are intended to provide revenue sufficient to recover
operating expenses and produce a reasonable return on common
equity.
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 August 2004.
Pursuant to Public Utilities Code Section 455.2, San Jose Water
Company is allowed 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.
On May 6, 2004, San Jose Water Company filed Advice Letter No.
348 with the CPUC requesting a revenue increase of $4,600,000, or
approximately 3.6%. The requested revenue increase is the result
of the increased cost of purchased water and higher pump tax
charged to San Jose Water Company by the Santa Clara Valley Water
District. The requested revenue increase was authorized
effective July 13, 2004.
On July 19, 2004, the CPUC issued a proposed decision in San Jose
Water Company's general rate case proceeding. The proposed
decision granted San Jose Water Company authority to increase
rates by $11,800,000 or 8% in 2004, $4,300,000 or 2.7% in 2005
and $4,200,000 or 2.6% in 2006. The proposed decision authorized
a return on common equity in 2004, 2005 and 2006 of 9.9%, which
is within the range of recent rates of return authorized by the
CPUC for water utilities. It is expected that the proposed
decision will be considered by the CPUC at its meeting scheduled
for August 19, 2004.
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 and March 30, 2004, San Jose Water Company filed two
compliance filings requesting Commission review of the balancing
account over-collected balance of approximately $389,000, accrued
between November 29, 2001 and December 31, 2003. As this amount
is immaterial as compared to overall revenue, rather than
refunding the balance, San Jose Water Company proposed that this
balance be carried forward to the next review period scheduled
for March 2005. On June 15, 2004, the Commission notified the
San Jose Water Company that the over-collected balances had been
verified and should be carried forward to the next review period.
The total ending balancing account balance as of June 30, 2004,
including all the outstanding balances currently pending before
the Commission, is a net under-collection of $291,000.
At June 30, 2004 and December 31, 2003, the balancing account had
a net balance as follows:
June 30 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 (91) (389)
------ ------
Net under/(over)-collected balance $ 291 $ (7)
====== ======
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) SJW Corp.'s management, with the participation of
the SJW Corp.'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 SJW Corp.'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 SJW Corp.
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. SJW Corp.
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
second 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 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Total Maximum
Number Number
of Shares of Shares
Purchased that May
Total Average as Part of Yet Be
Number Price Publicly Purchased
of Shares Paid per Announced Under the
Period Purchased Share Plan Plan
- -----------------------------------------------------------------
May 1, 2004-
May 31, 2004 895 $32.50 895 99,105
--- ------ --- ------
Total 895 $32.50 895 99,105
=== ====== === ======
On April 29, 2004, SJW Corp. announced that its board of
directors authorized a stock repurchase program to repurchase up
to 100,000 shares of its outstanding common stock over the
thirty-six months period following its announcement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2004 Annual Meeting of Shareholders of the SJW Corp. held
on April 29, 2004, an amendment of the By-Laws of the Corporation
was approved, eight individuals listed below were re-elected to
the Board of Directors, KPMG LLP was appointed as independent
auditors for 2004 and the authority to vote in the discretion of
the proxy holders was ratified by the following votes:
Proposal 1: Amendment of the By-Laws of the Corporation.
In Favor Against Abstain Broker Non-votes
- -------- ------- ------- ----------------
6,606,066 59,997 21,802 1,525,124
Proposal 2: Election of Directors.
Name of Director In Favor Against
- ---------------- -------- -------
Mark L. Cali 8,176,001 36,988
J. Philip DiNapoli 8,152,346 60,643
Drew Gibson 8,165,927 47,062
Douglas King 8,125,249 87,740
George E. Moss 8,168,494 44,495
W. Richard Roth 8,173,178 39,811
Charles J. Toeniskoetter 8,151,446 61,543
Frederick R. Ulrich 8,126,512 86,477
Proposal 3: Ratification of appointment of independent auditors
for 2004:
In Favor Against Abstain Broker Non-votes
- -------- ------- ------- ----------------
8,129,747 54,100 29,142 -
Proposal 4: Ratification of authority to vote in the discretion
of the proxy holders:
In Favor Against Abstain Broker Non-votes
- -------- ------- ------- ----------------
7,403,492 754,765 54,732 -
ITEM 5. OTHER INFORMATION
On July 29, 2004, the Board of Directors of the SJW Corp.
declared the regular quarterly dividend of $0.255 per common
share. The dividend will be paid September 1, 2004, to
shareholders of record as of the close of business on August 9,
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 second 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, audit
related 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 June 30,
2004.
(b.) Reports on Form 8-K.
SJW Corp. filed a current report on Form 8-K with the
Securities and Exchange Commission on May 3, 2004
to furnish its press release that announced its
Stock Repurchase Program to repurchase up to 100,000
shares under Item 5 thereof and its financial results
for the first quarter ended March 31, 2004 under Item
12 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: August 6, 2004 By /s/ Angela Yip
-----------------
ANGELA YIP
Chief Financial Officer and Treasurer
Vice President - Finance
EXHIBIT INDEX
-------------
Exhibit
No. Description of Document
- ------- -----------------------
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.
1