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 September 30, 2004
- ----------------------------------------------------------------
Commission file number 1-8966
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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
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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
- ----------------------------------------------------------------
(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 9,135,441.
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 NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
2004 2003 2004 2003
(Restated, Restated,
see Note 3) see Note 3)
--------------------------------------
OPERATING REVENUE $52,297 49,514 $128,969 115,634
OPERATING EXPENSES
Operation:
Purchased water 14,396 13,371 32,572 28,291
Power 2,108 2,147 4,519 4,260
Pump taxes 8,266 7,498 17,289 13,767
Administrative and
general 4,462 4,212 13,256 12,165
Other 3,108 3,111 9,644 9,402
Maintenance 2,216 2,069 6,503 5,745
Property taxes and other
nonincome taxes 1,352 1,313 4,006 3,804
Depreciation and
amortization 4,689 3,831 13,789 11,396
Income taxes 3,960 4,024 8,556 8,496
--------------------------------------
Total operating expenses 44,557 41,576 110,134 97,326
--------------------------------------
OPERATING INCOME 7,740 7,938 18,835 18,308
Gain on sale of nonutility
property, net of income
taxes of $2,105 - - - 3,030
Interest on long-term debt (2,372) (2,178) (7,136) (6,370)
Dividend income 311 309 932 928
Other, net (149) (102) (520) (221)
--------------------------------------
NET INCOME $ 5,530 5,967 $ 12,111 15,675
======================================
Other comprehensive
income (loss):
Unrealized income (loss)
on investment 2,002 (2,541) 2,166 2,376
Income taxes (821) 1,042 (888) (974)
---------------------------------------
Other comprehensive income
(loss), net 1,181 (1,499) 1,278 1,402
---------------------------------------
COMPREHENSIVE INCOME $ 6,711 4,468 $ 13,389 17,077
=======================================
EARNINGS PER SHARE
Basic $ 0.61 0.66 $ 1.33 1.72
Diluted $ 0.60 0.65 $ 1.32 1.71
=======================================
COMPREHENSIVE EARNINGS PER
SHARE
Basic $ 0.74 0.49 $ 1.47 1.87
Diluted $ 0.73 0.49 $ 1.46 1.87
DIVIDENDS PER SHARE $ 0.25 0.24 $ 0.76 0.73
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic 9,137,433 9,135,441 9,136,986 9,135,441
Diluted 9,198,718 9,152,832 9,193,627 9,141,237
See accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
SEPTEMBER 30 DECEMBER 31
2004 2003
(Restated,
see Note 3)
ASSETS ------------------------
UTILITY PLANT:
Land $ 1,735 $ 1,750
Depreciable plant and equipment 596,884 570,119
Construction in progress 9,133 4,000
Intangible assets 7,840 7,840
------------------------
Total utility plant 615,592 583,709
Less accumulated depreciation and
amortization 188,441 174,985
------------------------
Net utility plant 427,151 408,724
NONUTILITY PROPERTY 35,328 34,918
Less accumulated depreciation 2,992 2,349
------------------------
Net nonutility property 32,336 32,569
CURRENT ASSETS:
Cash and equivalents 6,489 10,278
Accounts receivable and accrued
unbilled utility revenue 24,096 15,043
Prepaid expenses and other 2,589 2,019
------------------------
Total current assets 33,174 27,340
OTHER ASSETS:
Investment in California Water
Service Group 32,306 30,139
Unamortized debt issuance and
reacquisition costs 3,330 3,447
Regulatory assets 8,409 7,976
Other 6,190 6,049
----------------------
Total other assets 50,235 47,611
----------------------
$542,896 $516,244
======================
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common stock $ 9,516 $ 9,516
Additional paid-in capital 13,996 13,375
Retained earnings 143,240 138,058
Accumulated other comprehensive income 6,698 5,419
----------------------
Total shareholders' equity 173,450 166,368
Long-term debt, less current portion 143,898 143,947
----------------------
Total capitalization 317,348 310,315
CURRENT LIABILITIES:
Current portion of long-term debt 47 184
Accrued pump taxes and purchased water 7,289 3,224
Purchased power 1,538 864
Accounts payable 6,773 2,217
Accrued interest 2,204 3,619
Accrued taxes 5,055 467
Other current liabilities 5,697 4,501
----------------------
Total current liabilities 28,603 15,076
DEFERRED INCOME TAXES AND CREDITS 42,715 38,207
ADVANCES FOR AND CONTRIBUTIONS
IN AID OF CONSTRUCTION 142,885 141,122
OTHER NONCURRENT LIABILITIES 11,345 11,524
----------------------
$542,896 $516,244
======================
See accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30
2004 2003
(Restated,
see Note 3)
----------------------
OPERATING ACTIVITIES:
Net income $ 12,111 $ 15,675
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 13,789 11,396
Deferred income taxes 4,508 4,262
Stock-based compensation 813 -
Gain on sale of nonutility
property, net of taxes - (3,030)
Changes in operating assets and
liabilities:
Accounts receivable and accrued
unbilled utility revenue (9,053) (7,665)
Accounts payable, purchased power
and other current liabilities 6,426 5,858
Accrued pump taxes and
purchased water 4,065 3,647
Accrued taxes 4,588 3,322
Accrued interest (1,415) (1,039)
Other noncurrent assets and
noncurrent liabilities (1,357) 468
Other changes, net (315) (556)
---------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 34,160 32,338
---------------------
INVESTING ACTIVITIES:
Additions to utility plant (33,175) (30,263)
Additions to nonutility property (280) (15,615)
Cost to retire utility plant, net of
salvage (277) (496)
Proceeds from sale of nonutility
property - 5,370
---------------------
NET CASH USED IN INVESTING ACTIVITIES (33,732) (41,004)
---------------------
FINANCING ACTIVITIES:
Repayments for line of credit,
net of borrowings - (11,450)
Long-term borrowings, net of repayments (186) 29,842
Stock issuance and buyback (137) -
Dividends paid (6,990) (6,645)
Receipts of advances and contributions
in aid of construction 4,645 11,733
Refunds of advances for construction (1,549) (1,275)
----------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (4,217) 22,205
----------------------
NET CHANGE IN CASH AND EQUIVALENTS (3,789) 13,539
----------------------
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 10,278 324
----------------------
CASH AND EQUIVALENTS, END OF PERIOD $ 6,489 $13,863
----------------------
Cash paid during the period for:
Interest $ 9,125 $ 6,812
Income taxes 1,550 1,558
See accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 condensed consolidated financial
statements accompanying this report.
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 earnings 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. Income available to common shareholders and comprehensive
income, respectively, adjusted for recognized stock compensation expense.
Diluted earnings per share and comprehensive earnings per share are
calculated using 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 the SJW Corp. Long-
Term Incentive Plan (the Incentive Plan).
For the three months ended September 30, 2004 and 2003, the basic weighted
average number of common shares was 9,137,433 and 9,135,441, respectively.
For the nine months ended September 30, 2004 and 2003, the basic weighted
average number of common shares was 9,136,986 and 9,135,441, respectively.
For the three and nine month periods ended September 30, 2004, the diluted
weighted average number of common shares outstanding was 9,198,718 and
9,193,627, respectively. The diluted weighted average number of common
shares was 9,152,832 and 9,141,237, respectively, for the three and nine
month periods ending September 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
earnings per share for the periods ended September 30, 2003 have been
adjusted to three and nine month periods to reflect the impact of the stock
split.
Note 2. Long-Term Incentive Plan
- ---------------------------------
The Corporation has reserved 900,000 common shares for issuance under the
Incentive Plan. As of September 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 recognized as income under the Incentive Plan was
$290,000 and $871,000 for the three and nine months ended September 30, 2004,
respectively. The total benefit, including non-employee directors' converted
post-retirement benefits, recorded in shareholders' equity under the
Incentive Plan was $813,000. As of September 30, 2004, $59,000 related to
dividend equivalent units was accrued as a liability.
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
the grant date as the 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 September 30, 2004, options to purchase 55,185
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 nine months ended September 30, 2004, the Corporation has
recognized stock compensation expenses of $32,000 and $97,000, respectively,
for the stock options granted under the Incentive Plan. For the three and
nine months ended September 30, 2003, the Corporation has recognized stock
compensation expenses of $10,000 and $16,000, respectively.
Deferred Restricted Stock Program
As of September 30, 2004 and 2003, restricted stock units for 41,670 shares
have been granted to a key employee of the Corporation under the Deferred
Restricted Stock Program. For the three and nine months ended September 30,
2004, the Corporation has recognized stock compensation expense of $128,000
and $384,000, respectively, related to these restricted stock units. For the
three and nine months ended September 30, 2003, the Corporation has
recognized stock compensation expense of $117,000.
As of September 30, 2004 and 2003, 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 September 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 $306,000 for the three and nine months ended September 30, 2004,
respectively, related to restricted stock units under the Deferred Restricted
Stock Program. For the three and nine months ended September 30, 2003, the
Corporation recognized stock compensation expense of $104,000.
In January 2004, 3,636 shares were issued at an exercise price of $29.75 per
share, to non-employee Board members who elected to convert their annual
retainer fee in restricted stock units under the Deferred Restricted Stock
Program. As of September 30, 2004, the Corporation has granted restricted
stock units for 4,920 shares in lieu of cash retainer fees. For the three
and nine months ended September 30, 2004, the Corporation has recognized
stock compensation expense of $28,000 and $85,000, respectively, related to
restricted stock units issued to non-employee Board members in connection
with their annual retainers.
Dividend Equivalent Rights
Under the Dividend Equivalent Rights Agreement, holders of options and
restricted stock units have the right to receive dividend rights each time a
dividend is paid on common shares after the grant date. Stock compensation
expenses are measured and recognized on dividend equivalent rights on the
date they are granted. The stock compensation expenses on stock options and
restricted stock units includes reported in this Note 2 include the stock
compensation expenses recognized on the dividend equivalent rights.
The stock options, deferred restricted stock programs, and dividend
equivalent rights are all offered through the Corporation's Incentive Plan.
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 September 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, less current portion $139,614 $143,947
Total capitalization 305,982 310,315
Other noncurrent liabilities 11,330 11,524
Total capitalization and liabilities 511,717 516,244
Three Months Ended September 30, 2003
As As
Previously Reported Restated
------------------- --------
(in thousands)
Consolidated Statements of Income
and Comprehensive Income:
Operating revenue $ 49,334 $ 49,514
Total operating expense 41,447 41,576
Operating income 7,887 7,938
Other, net (51) (102)
Net income 5,967 5,967
Comprehensive income 4,468 4,468
Nine Months Ended September 30, 2003
As As
Previously Reported Restated
------------------------------------
(in thousands)
Consolidated Statements of Income
and Comprehensive Income:
Operating revenue $ 115,093 $ 115,634
Total operating expense 96,974 97,326
Operating income 18,119 18,308
Other, net (32) (221)
Net income 15,675 15,675
Comprehensive income 17,077 17,077
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 $4,284,000
as of September 30, 2004. The mortgage loan is due 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 total operating revenue and operating expenses 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 nine months
ended September 30, 2004 and 2003:
Three Months Ended Three Months Ended
September 30, 2004 September 30, 2003
--------------------------------------------------
(in thousands)
Non- Non-
Regulated regulated Total Regulated regulated Total
--------- --------- ----- --------- --------- -----
Revenue $49,884 $2,413 $52,297 $47,315 $2,199 $49,514
Expenses 42,537 2,020 44,557 39,689 1,887 41,576
------- ------ ------- ------- ------ -------
Operating
Income $ 7,347 $ 393 $ 7,740 $ 7,626 $ 312 $ 7,938
======= ====== ======= ======= ====== =======
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
------------------------- -------------------------
(in thousands)
Non- Non-
Regulated regulated Total Regulated regulated Total
--------- --------- ----- --------- --------- -----
Revenue $121,998 $6,971 $128,969 $109,998 $ 5,636 $115,634
Expenses 104,573 5,561 110,134 92,427 4,899 97,326
------- ------ ------- -------- ------- --------
Operating
Income $ 17,425 $1,410 $ 18,835 $ 17,571 $ 737 $ 18,308
======== ====== ======== ======== ======== =======
Note 5. Depreciable Plant and Equipment
- ----------------------------------------
The major components of depreciable plant and equipment as of September 30,
2004 and December 31, 2003 are as follows:
September 30, December 31,
2004 2003
------------ -----------
(in thousands)
Equipment $ 49,710 $ 49,071
Transmission and distribution 469,466 455,030
Office buildings and other structures 77,708 66,018
-------- --------
Total $596,884 $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 the utility plants 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 September 30, 2004 and
December 31, 2003 are as follows:
September 30, December 31,
2004 2003
------------ -----------
(in thousands)
Land $ 9,917 $ 9,485
Buildings and improvements 25,180 25,202
Intangibles 231 231
Less: accumulated depreciation and
amortization 2,992 2,349
-------- -------
Total $ 32,336 $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 utility 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 nine months ended
September 30, 2004 and 2003 are as follows:
Three Months Nine Months
Ended September 30 Ended September 30
2004 2003 2004 2003
------------------------------------
(in thousands)
Service cost $ 438 354 $ 1,314 1,062
Interest cost 762 685 2,286 2,055
Other cost 238 189 714 567
Expected return on
assets (639) (548) (1,917) (1,644)
----- ---- ------- -----
$ 799 680 $ 2,397 2,040
===== ==== ======= =====
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.
For the first nine months of 2004, SJW Corp. repurchased a total of 4,295
shares of its outstanding common stock at the prevailing price in the open
market at an aggregate cost of $144,000. All repurchased shares will be
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 non-
regulated businesses, SJW Land Company and its consolidated variable interest
entity - 444 West Santa Clara Street, L.P. (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 of the
Corporation not included in the reportable segment is included in the "All
Other" category.
For Three Months Ended September 30, 2004
(in thousands)
---------------------------------------
All SJW
SJWC Other* Corp.
------------ ---------- -----------
Operating revenue $ 51,086 $ 1,211 $ 52,297
Operating expense 43,504 1,053 44,557
Net income 5,335 195 5,530
Depreciation and
amortization 4,513 176 4,689
Interest on long-term
debt 2,372 - 2,372
Total assets $475,147 $67,749 $542,896
For Three Months Ended September 30, 2003
(in thousands)
---------------------------------------
All SJW
SJWC Other* Corp.
------------ ---------- -----------
Operating revenue $ 48,466 $ 1,048 $ 49,514
Operating expense 40,593 983 41,576
Net income 5,760 207 5,967
Depreciation and
amortization 3,684 147 3,831
Interest on long-term
debt 2,178 - 2,178
Total assets $452,777 $63,548 $516,325
For Nine Months Ended September 30, 2004
(in thousands)
---------------------------------------
All SJW
SJWC Other* Corp.
------------ ---------- -----------
Operating revenue $124,926 $ 4,043 $128,969
Operating expense 106,889 3,245 110,134
Net income 11,212 899 12,111
Depreciation and
amortization 13,271 518 13,789
Interest on long-term
debt 7,136 - 7,136
Total assets $475,147 $67,749 $542,896
For Nine Months Ended September 30, 2003
(in thousands)
---------------------------------------
All SJW
SJWC Other* Corp.
------------ ---------- ----------
Operating revenue $112,532 $ 3,102 $115,634
Operating expense 94,399 2,927 97,326
Net income 14,425 1,250 15,675
Depreciation and
amortization 11,042 354 11,396
Interest on long-term
debt 6,370 - 6,370
Total assets $452,777 $63,548 $516,325
*The "All Other" category includes SJW Land, CCWS and without regard to its
subsidiaries, SJW Corp. 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. SJW Corp. 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
San Jose Water Company's commitments.
Note 11. Proposed Settlement Under Threat of Eminent Domain
(Subsequent Event)
- -------------------------------------------------------------
In January 2002, SJW Land Company entered into an Agreement for Possession
and Use (the Agreement) with Valley Transportation Agency (VTA) whereby SJW
Land Company 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 had already adopted a resolution authorizing a
condemnation proceeding to acquire the land and deposited $3.7 million in an
escrow account as fair market compensation. SJW Land Company waived its
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 could 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 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 and any damage was to be
determined by the court or by way of settlement between SJW Land Company and
VTA. A trial scheduled to commence on November 1, 2004, was cancelled
because the parties believe they are close to finalizing a settlement through
a mediation overseen by a retired judge. The settlement is expected to
include a cash payment in excess of the $3,700,000 discussed above and the
conveyance of a parcel to SJW Land Company. The VTA and SJW are working
through the final details of the settlement, which has to be approved by the
Superior Court of Santa Clara County, and is expected to be completed by the
end of 2004.
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 services 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. San Jose Water
Company 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. The limited partnership has been determined to be a Variable
Interest Entity within the scope of FIN 46R, and as a result, it had been
consolidated with SJW Land Company.
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 6% of its outstanding shares as of September 30,
2004.
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 tracked and subject to approval 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. The balancing
account under-collection balance accrued prior to November 29, 2001 has been
recovered through rate increases authorized by the CPUC. At September 30,
2004 and December 31, 2003, the balancing account had a net balance as
follows:
September 30 December 31
2004 2003
------------ -----------
(in thousands)
Under(over)-collection accrued from
November 30, 2001 to period end $602 $(389)
Revenue Recognition
San Jose Water Company's revenue from metered customers includes billings to
customers 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 September 30, 2004 and
December 31, 2003, accrued unbilled revenue was $13,006,000 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 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.
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
September 30, 2004 and December 31, 2003. The net regulatory asset recorded
by San Jose Water Company as of September 30, 2004 and December 31, 2003 was
$8,409,000 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 employees, mortality, turnover and medical
costs.
San Jose Water Company, through its Retirement Plan Administrative Committee
(the Committee) comprised of 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. The committee
requires that equities 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 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 amounts 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 the 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 recognizes 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 of Crystal Choice Water
Service LLP 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
with 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
noncontrolling 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 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. As described in Note 3. Partnership Interest
Restatement, the financial statements for 2003 have been restated to reflect
this change.
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. Out of the total budgeted capital
expenditures of $31,158,000, $20,292,000 has been spent as of September 30,
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 the utility
plants 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 September 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 San Jose
Water Company 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 September 30, 2004, San Jose Water Company's funded debt
and equity were 48.47% and 51.53%, 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 September 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 September 30, 2004, San Jose Water Company's funded debt was
48.47% of total capitalization and the net income for the preceding twelve
months was 360% 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 (SDWSRF) 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 September 30, 2004, the loan has not been
funded. San Jose Water Company will request the funding in the fourth
quarter of 2004 when the loan documentation and contract requirements are
met.
In August 2004, the Department of Water Resources approved San Jose Water
Company's application for a second loan under the SDWSRF program. The loan
is for approximately $1,660,000 over a term of twenty years at an interest
rate of 2.60%. Funds in the above amount will be used for water treatment
plant improvements to meet increasing filtration standards. San Jose Water
Company does not expect to receive the funding of this loan until 2005.
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 aggregate 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 $4,284,000 as of September 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 September 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
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Overview
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SJW Corp.'s consolidated net income for the three months ended September 30,
2004 was $5,530,000, a decrease of $437,000 or 7% from $5,967,000 in the
third quarter of 2003. Nine months net income was $12,111,000, a decrease of
$3,564,000 or 23% from $15,675,000 for the same period in 2003. The nine
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
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Operating Revenue by Subsidiary
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
(Restated) (Restated)
---------------------------------------
(in thousands)
San Jose Water Company $51,086 $48,466 $124,926 $112,532
SJW Land Company 786 765 2,713 2,214
Crystal Choice Water
Service 425 283 1,330 888
----------------- ------------------
$52,297 $49,514 $128,969 $115,634
================= ==================
Operating revenue for the third quarter was $52,297,000 versus $49,514,000
for the same period in 2003, representing an increase of $2,783,000 or 6%.
Approximately $3,050,000 of the revenue increase was attributable to
cumulative rate increases. Additionally, growth in the number of customers
contributed $176,000 to increased revenues and other revenues increased by
$163,000. The revenue increases were offset by a $606,000 decrease due to
lower usage.
Operating revenue for the nine months ended September 30, 2004, was
$128,969,000 versus $115,634,000 for the same period in 2003, representing an
increase of $13,335,000 or 12%. Approximately $7,318,000 of the revenue
increase was due to a 6.61% rate increase, $4,739,000 resulting from an
increase in usage and $337,000 due to customer growth at San Jose Water
Company.
SJW Land Company's lease revenue increased by $21,000 and $499,000 for the
third quarter and nine months ended September 30, 2004, respectively, and 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 $142,000 and $442,000
for the third quarter and nine months ended September 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 Nine Months Ended
September 30, September 30,
2004 vs. 2003 2004 vs. 2003
Increase/(decrease) Increase/(decrease)
------------------------------------------
Utility: (in thousands)
Consumption changes $ (606) (1%) $ 4,739 4%
New customers increase 176 1% 337 -
Rate increases 3,050 6% 7,318 6%
Parking and rental 21 - 499 1%
Crystal Choice Water
Service LLC 142 - 442 1%
--------------- ---------------
$ 2,783 6% $ 13,335 12%
=============== ===============
Operating Expenses
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Operating Expenses by Subsidiary
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
(Restated) (Restated)
(in thousands)
------------------------------------------
San Jose Water Company $43,504 40,593 $106,889 94,399
SJW Land Company 435 511 1,412 1,501
Crystal Choice Water
Service LLC 437 381 1,318 1,066
SJW Corp. 181 91 515 360
----------------- -----------------
$44,557 41,576 $110,134 97,326
================ =================
The change in operating expenses from the same period in 2003 was due to the
following factors:
Three Months Ended Nine Months Ended
September 30 September 30
2004 vs. 2003 2004 vs. 2003
Increase/(decrease) Increase/(decrease)
(in thousands)
------------------------------------------
Water production costs:
Decreased surface
water supply $ 731 2% $ 1,508 2%
Usage and new
customers (525) (2%) 3,050 3%
Pump tax and purchased
water price increase 1,620 4% 3,906 4%
Energy prices (72) - (402) -
------------- --------------
Total water production
costs 1,754 4% 8,062 9%
------------- --------------
Non-water production costs:
Administrative and
general 250 1% 1,091 1%
Other operating expense (3) - 242 -
Maintenance 147 - 758 1%
Property taxes and other
non-income taxes 39 - 202 -
Depreciation and
amortization 858 2% 2,393 2%
------------- --------------
Total non-water
production costs 1,291 3% 4,686 4%
------------- --------------
Income taxes (64) - 60 -
------------- --------------
Total operating expenses $2,981 7% $12,808 13%
============= ==============
Water production costs increased $1,754,000 or 4% of total costs and expenses
for the third quarter of 2004. The higher costs were primarily attributable
to increases of $1,620,000 in the combined cost of purchased water and pump
taxes from Santa Clara Valley Water District (SCVWD) and reduced surface
water availability of $731,000. This increase was offset by a decrease in
customer demand of $525,000 in addition to lower non-contract water and power
costs of $72,000.
For the nine months ended September 30, 2004, the increase of $8,062,000 in
total water production costs from the same period in 2003 were due to
increases of $3,906,000 in the cost of purchased water and pump taxes,
$1,508,000 in reduced surface water availability and $3,050,000 due to
increased usage and new customers. These increases were offset by a decrease
of $402,000 in energy and other costs.
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 third
quarter of 2004, the water production costs increased by $731,000.
Water production for the three months ended September 30, 2004 decreased 358
million gallons and increased 2,174 million gallons for the nine months ended
September 30, 2004 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 Nine Months Ended
September 30 September 30
2004 vs. 2003 2004 vs. 2003
Increase/(decrease) Increase/(decrease)
(in million gallons)
-------------------------------------------
Purchased water (34) - 1,154 3%
Ground water 136 1% 1,951 5%
Surface water (481) (3%) (1,031) (2%)
Reclaimed water 20 - 100 -
--------------- ---------------
(359) (2%) 2,174 6%
=============== ===============
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
expenses, maintenance, depreciation and amortization, property taxes and
other non-income taxes in the third quarter of 2004, increased $1,291,000
compared to the same period in 2003. The increase in Administrative and
General expenses included $309,000 in labor and labor related expenses due to
bargaining unit wage escalation and new hires. Depreciation expense
increased $858,000 due to higher investment in utility plants. Other
increases of $124,000 were due to various costs, including legal and
professional fees, insurance and related costs and contracted work related to
ongoing projects.
For the nine months ended September 30, 2004, the non-water production costs
increased by $4,686,000 over the same period in 2003. The increase in
Administrative and General expenses included $193,000 in pension costs
primarily as a result of the enhancement of pension plan benefits.
Depreciation expense increased $2,393,000 due to higher investment in the
utility plants. Other increases include $232,000 in legal and professional
fees, $253,000 in insurance and related costs, $354,000 in contracted work
related to various projects, $1,063,000 in wages, salaries and stock
compensation, and $198,000 in other costs.
Income tax expense decreased by $64,000 for the third quarter ended September
30, 2004 over the same period in 2003 due to reduction in earnings in 2004.
Income tax expense increased by $60,000 for the nine months ended September
30, 2004 due to increased earnings. The effective income tax rates for the
periods ended September 30, 2004 and 2003 both approximated 41%.
The increase in interest expenses for the third quarter and nine months ended
September 30, 2004 from the same periods in 2003 was the result of higher
interest expenses due to the issuance of Series G senior notes in September,
2003, and the long-term debt associated with the commercial properties in
Connecticut and Florida acquired in April 2003.
The changes in comprehensive income for the three months and nine months
ended September 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 (the Agreement) with Valley Transportation Agency (VTA) whereby SJW
Land Company 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 had already adopted a resolution authorizing a
condemnation proceeding to acquire the land and deposited $3.7 million in an
escrow account as fair market compensation. SJW Land Company waived its
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 could 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 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 and any damage was to be
determined by the court or by way of settlement between SJW Land Company and
VTA. A trial scheduled to commence on November 1, 2004, was cancelled
because the parties believe they are close to finalizing a settlement through
a mediation overseen by a retired judge. The settlement is expected to
include a cash payment in excess of the $3,700,000 discussed above and the
conveyance of a parcel to SJW Land Company. The VTA and SJW are working
through the final details of the settlement, which has to be approved by the
Superior Court of Santa Clara County, and is expected to be completed by the
end of 2004.
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 October 18, 2004, the SCVWD's ten reservoirs were 45.50% full with 76,850
acre-feet of water in storage. The rainfall in the season commencing July 1,
2004 was approximately 45% of historical season average. Average rainfall
for the prior five-year period is 30%.
As of September 30, 2004, rainfall at San Jose Water Company's Lake Elsman
measured 0.0 inches for the season beginning July 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 continues 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 terrorist 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 of 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.
As required by the CPUC, on May 23, 2003, San Jose Water Company filed a
General Rate Case Application with the CPUC. Effective January 1, 2004, the
CPUC allowed San Jose Water Company an interim rate increase of approximately
2% as they had not reached a decision on San Jose Water Company's 2003
General Rate Case application. Additionally, effective July 13, 2004 the
CPUC authorized a revenue increase totaling $4.6 million to offset increases
in purchased water and pump tax costs imposed on San Jose Water Company by
the Santa Clara Valley Water District. On August 19, 2004, the CPUC issued
the final decision (D.04-08-054) in San Jose Water Company's General Rate
Case Application. The decision grants San Jose Water Company authority to
increase rates by $11,773,000 or 8% in 2004, $4,283,000 or 2.69% in 2005 and
$4,245,000 or 2.59% in 2006. The authorized 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. San Jose Water Company was also
authorized to recover 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. The new
authorized rates became effective August 24, 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. It is expected that this recovery for San Jose Water
Company will become effective in early 2005.
Balancing Account Recovery Procedures
- -------------------------------------
On March 16, 2004 the California Public Utilities Commission 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 the pre-November 29, 2001 Balancing Account via a customer
surcharge. On August 19, 2004, the CPUC issued D.04-08-054 granting recovery
of the under-collection of the pre-November 29, 2001 Balancing Account by way
of a twelve-month Quantity Rate Surcharge. The surcharge became effective
August 24, 2004. 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 San Jose Water Company that the over-collected balances
had been verified and should be carried forward to the next review period.
The balancing account under-collection balance accrued prior to November 29,
2001 has been recovered through rate increases authorized by the CPUC. The
balancing account balance as of September 30, 2004 is a net under-collection
of $602,000.
At September 30, 2004 and December 31, 2003, the balancing account had a net
balance as follows:
September 30 December 31
2004 2003
------------ -----------
(in thousands)
Under(over)-collection accrued from
November 30, 2001 to period end $602 $(389)
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) There has been no change in internal control over
financial reporting during the third 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
"Non-regulated 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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
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
August 1, 2004-
August 31, 2004 3,400 $33.93 3,400 95,705
----- -----
Total 4,295 $33.63 4,295
===== =====
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 5. OTHER INFORMATION
-----------------
On October 28, 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 December 1, 2004, to shareholders of record as of the close of business
on November 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
third 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: consultations concerning state taxes and protest of tax assessment
from the California Franchise Tax Board.
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 September
30, 2004.
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: November 8, 2004 By /s/ Angela Yip
-----------------
ANGELA YIP
Chief Financial Officer and Treasurer
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.