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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period to
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, California 95196
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 408-279-7800
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, Par Value $3.125 American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
(Title of Class)
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [_]
The aggregate market value of the common stock held by non-affiliates
of the registrant on June 28, 2002 was $165,232,386.
Shares of common stock outstanding on March 7, 2003 -- 3,045,147.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement relating to the
Registrant's 2003 Annual Meeting of Shareholders, to be held on April 29, 2003,
are incorporated by reference into Part III of this Form 10-K where indicated.
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EXHIBIT INDEX
The Exhibit Index to this Form 10-K is located in Part IV,
Item 15 of this document.
TABLE OF CONTENTS
Page
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PART I
Forward-Looking Statements ............................................................... 2
Item 1. Business ........................................................................ 2
a. General Development of Business ................................................. 2
b. Financial Information About Industry Segments ................................... 3
c. Narrative Description of Business ............................................... 4
General ......................................................................... 4
Water Supply .................................................................... 4
Franchises ...................................................................... 5
Seasonal Factors ................................................................ 5
Competition and Condemnation .................................................... 5
Environmental Matters ........................................................... 6
Employees ....................................................................... 6
d. Financial Information About Foreign and Domestic Operations and Export Sales .... 8
Item 2. Properties ...................................................................... 8
Item 3. Legal Proceedings ............................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders ............................. 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ........... 9
a. Market Information .............................................................. 9
b. Holders ......................................................................... 9
c. Dividends ....................................................................... 9
Item 6. Selected Financial Data ......................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ...................................................................... 11
Item 7a. Quantitative and Qualitative Disclosures About Market Risk ...................... 22
Item 8. Financial Statements and Supplementary Data ..................................... 23
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial 38
Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant .............................. 38
Item 11. Executive Compensation .......................................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ............................................................. 38
Item 13. Certain Relationships and Related Transactions .................................. 38
PART IV
Item 14. Controls and Procedures ......................................................... 39
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................ 39
Exhibit Index ............................................................................ 40
Signatures ............................................................................... 42
Certifications ........................................................................... 44
1
PART I
Forward-Looking Statements
This report contains forward-looking statements within the meaning of
the federal securities laws relating to future events and future results of SJW
Corp. and its subsidiaries that are based on current expectations, estimates,
forecasts, and projections about the industries in which SJW Corp. operates and
the beliefs and assumptions of the management of SJW Corp. Such forward-looking
statements are identified by words including "expect", "estimate", "anticipate"
and similar expressions. These forward-looking statements are only predictions
and are subject to risks, uncertainties, and assumptions that are difficult to
predict. Therefore, actual results may differ materially and adversely from
those expressed in any forward-looking statements. Important factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in this report under the section entitled "Factors That May Affect
Future Results" under Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere, and in other reports SJW
Corp. files with the Securities and Exchange Commission ("SEC"), specifically
the most recent reports on 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.
Item 1. Business
(a) General Development of Business
SJW Corp. was incorporated in California on February 8, 1985. SJW Corp.
is a holding company with three subsidiaries.
San Jose Water Company, a wholly owned subsidiary, with headquarters at
374 West Santa Clara Street, San Jose, California 95196, was originally
incorporated under the laws of the State of California in 1866. The company was
later reorganized and reincorporated as the San Jose Water Works. San Jose Water
Works was reincorporated in 1985 as San Jose Water Company, with SJW Corp. as
the parent holding company. San Jose Water Company is a public utility in the
business of providing water service to a population of approximately one million
people in an area comprising about 138 square miles in the metropolitan San Jose
area. San Jose Water Company's web site can be accessed via the Internet at
http://www.sjwater.com.
SJW Land Company, a wholly owned subsidiary, was incorporated in 1985.
SJW Land Company owns and operates parking facilities which are located adjacent
to San Jose Water Company's headquarters and the HP Pavilion in San Jose,
California. SJW Land Company also owns commercial buildings and other
undeveloped land in the San Jose Metropolitan area, and a 70% limited
partnership interest in 444 West Santa Clara Street, L.P.
Crystal Choice Water Service LLC, a 75% majority-owned limited
liability subsidiary formed in January 2001, engages in the sale and rental of
water conditioning and purification equipment.
SJW Corp. also owns 1,099,952 shares of California Water Service Group.
Regulation and Rates
San Jose Water Company's rates, service and other matters affecting its
business are subject to regulation by the California Public Utilities Commission
(CPUC).
Ordinarily, there are two types of rate increases, general and offset.
General rate case decisions usually authorize an initial rate increase followed
by two annual step increases designed to maintain the authorized return on
equity over a three-year period. General rate applications are normally filed
and processed during the last year covered by the most recent rate case in an
attempt to avoid regulatory lag.
The purpose of the offset rate increase is to compensate utilities for
increases in specific expenses, such as those for purchased water, pump tax or
purchased power.
2
Pursuant to Section 792.5 of the California Public Utilities Code, a
balancing account must be maintained for each expense item for which revenue
offsets have been authorized (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. At December 31, 2002, the balancing
account had a net under-collected balance of $262,000.
On September 30, 2002, Governor Davis signed the California Assembly
Bill 2838 into law. The bill allows for the implementation of interim water
rates in general rate cases when the CPUC fails to establish new rates in
accordance with the established rate case schedule. The interim rates would be
based on a water company's existing rates increased for the amount of inflation
since the last approved rate adjustment. The bill also allows for revenue
true-up from the time of the implementation of the interim rates to the time of
the CPUC's ultimate decision in the rate case. In principle, this mechanism is
designed to eliminate the adverse financial impact on water utilities caused by
regulatory delays in general rate cases. The bill was codified as Public
Utilities Code Section 455.2 and became effective on January 1, 2003.
Please also see the heading "Factors That May Affect Future Results"
under Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
(b) Financial Information About Industry Segments
SJW Corp. is a holding company with three subsidiaries: San Jose Water
Company (SJWC), a water utility operation with both regulated and non-regulated
business, SJW Land Company (SJW Land), which operates parking facilities and
commercial building rentals, and Crystal Choice Water Service (CCWS), a water
conditioning and purification equipment sale and rental business. The tables
below set forth information relating to SJW Corp.'s operating segments. Included
in the amounts set forth, certain assets, revenue and expenses have been
allocated. The total assets are net of accumulated depreciation.
Year Ended December 31, 2002
(in thousands)
--------------------------------------------------------------
SJW SJW
SJWC Land CCWS Corp. Corp.
----------- -------- ------------ --------- ----------
Operating revenue ......... $143,092 1,860 700 -- 145,652
Net income (loss) ......... 13,295 674 (350)* 613 14,232
Total assets .............. 414,381 18,168 780 19,894 453,223
Year Ended December 31, 2001
(in thousands)
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SJW SJW
SJWC Land CCWS Corp. Corp.
----------- -------- ------------ --------- ----------
Operating revenue ......... $134,047 1,752 284 -- 136,083
Net income (loss) ......... 12,721 680 (483)* 1,099 14,017
Total assets .............. 388,750 13,306 707 28,254 431,017
Year Ended December 31, 2000
(in thousands)
--------------------------------------------------------------
SJW SJW
SJWC Land CCWS Corp. Corp.
----------- -------- ------------ --------- ----------
Operating revenue ......... $121,339 1,818 -- -- 123,157
Net income (loss) ......... 12,837 698 -- (2,870) 10,665
Total assets .............. 348,754 12,959 -- 30,217 391,930
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* Before income taxes and minority interest.
3
(c) Narrative Description of Business
General
The principal business of San Jose Water Company consists of the
production, purchase, storage, purification, distribution and retail sale of
water. San Jose Water Company provides water service to customers in portions of
the cities of Cupertino and San Jose and in the cities of Campbell, Monte
Sereno, Saratoga and the Town of Los Gatos, and adjacent unincorporated
territory, all in the County of Santa Clara in the State of California. It
distributes water to customers in accordance with accepted water utility
methods, which include pumping from storage and gravity feed from high elevation
reservoirs.
San Jose Water Company also provides nonregulated water related
services under agreements with municipalities. These nonregulated services
include full water system operations, billings and cash remittances.
In October 1997, San Jose Water Company commenced operation of the City
of Cupertino municipal water system under terms of a 25-year lease. The system
is adjacent to the existing San Jose Water Company service area and has 4,200
service connections. Under terms of the lease, San Jose Water Company paid an
up-front $6.8 million concession fee to the City which will be amortized over
the contract term. The company is responsible for all aspects of system
operation including capital improvements.
The operating results from the water business fluctuates according to
the demand for water, which is often influenced by seasonal conditions, such as
summer temperatures or the amount and timing of precipitation in San Jose Water
Company's service area. Revenue, production costs and income are affected by the
changes in water sales and availability of surface water supply. Overhead costs,
such as payroll and benefits, depreciation, interest on long-term debt and
property taxes, remain fairly constant despite variations in the amount of water
sold. As a result, earnings are highest in the higher use, warm weather summer
months and lowest in the cool winter months.
Water Supply
San Jose Water Company's water supply is obtained from wells, surface
run-off and diversion and by purchases from the Santa Clara Valley Water
District (SCVWD). Under the terms of a master contract with SCVWD expiring in
2051, purchased water provides approximately 40% to 45% of San Jose Water
Company's annual production. Surface supplies, which during a year of normal
rainfall satisfy about 6% to 8% of San Jose Water Company's current annual
needs, provide approximately 1% of its water supply in a dry year and
approximately 14% in a wet year. In dry years, the decrease in water from
surface run-off and diversion, and the corresponding increase in purchased and
pumped water, increases production costs substantially.
The pumps and motors at San Jose Water Company's groundwater production
facilities are propelled by electric power. Over the last few years, San Jose
Water Company has installed standby power generators at 18 of its strategic
water production sites. In addition, the commercial office and operations
control centers are equipped with standby generators that allow critical
distribution and customer service operations to continue during a power outage.
The SCVWD has informed San Jose Water Company that its filter plants, which
deliver purchased water to San Jose Water Company, are also equipped with
standby generators. In the event of a power outage, San Jose Water Company
believes it will be able to prevent an interruption of service to customers for
a limited period by pumping water with its standby generators and by using the
purchased water from SCVWD.
Until 1989, San Jose Water Company had never found it necessary to
impose mandatory water rationing. Except in a few isolated cases when service
had been interrupted or curtailed because of power or equipment failures,
construction shutdowns, or other operating difficulties, San Jose Water Company
had not at any prior time in its history interrupted or imposed mandatory
curtailment of service to any type or class of customer. During the summer of
1989 through March 1993, rationing was imposed intermittently to all customers
at the request of SCVWD.
Groundwater in 2002 remained comparable to the 30-year normal level. On
January 23, 2003, the SCVWD's ten reservoirs were 55.3% full with 93,663
acre-feet of water in storage. The rainfall from
4
July 2002 to January 2003 was about average. The water supply outlook for 2003
is encouraging with early projections for delivery of California and Federal
contract water to the SCVWD at above average quantities for the season to date.
San Jose Water Company believes that its various sources of water supply are
sufficient to meet customer demand for the remainder of the year.
Rainfall at San Jose Water Company's Lake Elsman was measured at 30.36
inches for the season from July 1 through December 31, 2002, which is above the
five-year average.
While the water supply outlook for 2003 is good, California faces
long-term water supply challenges. San Jose Water Company actively works with
SCVWD to meet the challenges by continuing to educate customers on responsible
water use practices and to conduct long-range water supply planning. Please also
see further discussion at "Factors That May Affect Future Results" under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Franchises
San Jose Water Company holds such franchises or permits in the
communities it serves as it judges necessary to operate and maintain its
facilities in the public streets.
Seasonal Factors
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 climatic conditions can cause seasonal water consumption by
residential customers to vary significantly.
Competition and Condemnation
San Jose Water Company is a public utility regulated by the CPUC and
operates within a service area approved by the CPUC. The laws of the State of
California provide that no other investor-owned public utility may operate in
San Jose Water Company's service area without first obtaining from the CPUC a
certificate of public convenience and necessity. Past experience shows such a
certificate will be issued only after demonstrating San Jose Water Company's
service in such area is inadequate.
California law also provides that whenever a public agency constructs
facilities to extend utility service to the service area of a privately owned
public utility (like San Jose Water Company), such an act constitutes the taking
of property and is conditioned upon payment of just compensation to the private
utility.
Under the constitution and statutes of the State of California,
municipalities, water districts and other public agencies have been authorized
to engage in the ownership and operation of water systems. Such agencies are
empowered to condemn properties operated by privately owned public utilities
upon payment of just compensation and are further authorized to issue bonds
(including revenue bonds) for the purpose of acquiring or constructing water
systems. To the company's knowledge, no municipality, water district or other
public agency has pending any action to condemn any part of San Jose Water
Company's system.
In January 2002, SJW Land Company entered into an Agreement for
Possession and Use (Agreement) with the Valley Transportation Agency (VTA)
whereby SJW Land Company has granted VTA an irrevocable right to possession and
use of 1.23 acres of the company's parking lot property for the development of a
light rail station. VTA has adopted a resolution authorizing a condemnation
proceeding to acquire the land and has deposited $3.7 million in an escrow
account as fair market compensation. SJW Land Company waived the right to
challenge VTA's possession and use in any subsequent eminent domain proceeding
but reserved the right to assert, and has disputed, the fair market value placed
on the land. According to the terms of the Agreement, if a settlement is not
reached within three months of the execution of the Agreement, VTA can file an
eminent domain complaint to acquire title to the parking lot property. As of
January 29, 2003, VTA has not filed a complaint and SJW Land Company continues
to negotiate in good faith with VTA over the fair market value. This transaction
will be booked and is expected to result in an increase to net income, if and
when the compensation issue is settled or a final court order is rendered.
5
Environmental Matters
San Jose Water Company maintains procedures to produce potable water in
accordance with all applicable county, state and federal environmental rules and
regulations. Additionally, San Jose Water Company is subject to environmental
regulation by various other governmental authorities.
In December 1998, the United States Environmental Protection Agency
(EPA) established more stringent surface water treatment performance standards
and new drinking water standards for disinfection byproducts. San Jose Water
Company is in compliance with both regulations, which became effective January
1, 2002.
In January 2001, EPA finalized new regulations revising the primary
maximum contaminant level (MCL) for arsenic from 50 parts per billion (ppb) down
to 10 ppb. San Jose Water Company has monitored its water supply sources for
arsenic and is in compliance with the new regulations, which will become
effective in 2006.
Other state and local environmental regulations apply to San Jose Water
Company's operations and facilities. These regulations relate primarily to the
handling, storage and disposal of hazardous materials. San Jose Water Company is
currently in compliance with state and local regulations governing hazardous
materials, point and non-point source discharges, and the warning provisions of
the California Safe Drinking Water and Toxic Enforcement Act of 1986. Please
also see Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Employees
As of December 31, 2002, San Jose Water Company had 301 employees, of
whom 77 were executive, administrative or supervisory personnel, and of whom 224
were members of unions. San Jose Water Company reached a three-year collective
bargaining agreement with the Utility Workers of America, representing the
majority of employees, and the International Union of Operating Engineers,
representing certain employees in the engineering department, covering the years
2001 through 2003. Both groups are affiliated with the AFL-CIO.
6
Executive Officers of the Registrant
Name Age Offices and Experience
- ------------------------- ----- --------------------------------------------------------------
W.R. Roth ............... 50 SJW Corp. -- President and Chief Executive Officer of the
Corporation. Prior to becoming Chief Executive Officer in
1999, he was President from October 1996, Vice President
from April 1992 until October 1996 and Chief Financial
Officer since October 1996. Mr. Roth has served as a director
of SJW Corp., San Jose Water Company and SJW Land
Company since 1994.
R.J. Balocco ............ 53 San Jose Water Company -- Vice President, Corporate
Communications. Prior to becoming Vice President,
Corporate Communications in 1995, he was Vice President,
Administration from April 1992. Mr. Balocco has been
with San Jose Water Company since 1982.
G.J. Belhumeur .......... 57 San Jose Water Company -- Vice President, Operations.
Prior to becoming Vice President, Operations in 1996, he was
Operations and Maintenance Manager. Mr. Belhumeur has
been with San Jose Water Company since 1970.
D. Drysdale ............. 47 San Jose Water Company -- Vice President, Information
Services. Prior to becoming Vice President, Information
Services in 1999, he was Director of Information Services
from 1998 and Data Processing Manager since 1994. Mr.
Drysdale has been with San Jose Water Company since 1992.
J. Johansson ............ 57 San Jose Water Company -- Vice President, Human
Resources. Prior to becoming Vice President, Human
Resources in 1999, he was Director of Human Resources
from 1998. Prior to 1998 he was Personnel Manager.
Mr. Johansson has been with San Jose Water Company
since 1976.
R.J. Pardini ............ 57 San Jose Water Company -- Vice President, Chief Engineer.
Prior to becoming Vice President, Chief Engineer in 1996,
he was Chief Engineer. Mr. Pardini has been with San Jose
Water Company since 1987.
A. Yip .................. 49 SJW Corp. -- Chief Financial Officer and Treasurer since
October 1996, and Vice President, Finance of San Jose Water
Company as of January 1999. Prior to Vice President,
Finance, Ms. Yip served as Chief Financial Officer and
Treasurer from October 1994 until December 1999. Ms. Yip
has been with San Jose Water Company since 1986.
R.S. Yoo ................ 52 San Jose Water Company -- Vice President, Water Quality.
Prior to April 1996, he served as Water Quality Manager. Mr.
Yoo has been with San Jose Water Company since 1985.
R.A. Loehr .............. 56 SJW Corp. and San Jose Water Company -- Secretary. He
has served as Secretary since March 1, 1998 and has
been with San Jose Water Company since 1987, and serves as
its attorney.
V.K. Wong ............... 33 San Jose Water Company -- Controller. He has been with
San Jose Water Company since December 16, 2002. He
served as the Director of Finance for Golden State Warriors
from October 1998 until October 2002 and prior to October
1998, Mr. Wong was a senior auditor for KPMG LLP.
7
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Substantially, all of SJW Corp.'s revenue and expense are derived from
operations located in the County of Santa Clara in the State of California.
SJW Corp. maintains a website with the address http://www.sjwater.com.
The information contained on this website is not a part of, or incorporating it
by reference into, this report. SJW Corp.'s Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and current reports on Form 8-K, and amendments
to these reports are made available free of charge through SJW Corp.'s website,
as soon as reasonably practicable after it electronically files such material
with, or furnish such material to, the Securities and Exchange Commission.
Item 2. Properties
The properties of San Jose Water Company consist of a unified system of
water production, storage, purification and distribution located in the County
of Santa Clara in the State of California. In general, the property is comprised
of franchise rights, water rights, necessary rights-of-way, approximately 7,000
acres of land held in fee (which is primarily non-developable watershed),
impounding reservoirs with a capacity of approximately 2.256 billion gallons,
diversion facilities, wells, distribution storage of approximately 240 million
gallons and all water facilities, equipment and other property necessary to
supply its customers.
San Jose Water Company maintains all of its properties in good
operating condition in accordance with customary practice for a water utility.
San Jose Water Company's well pumping stations have a production capacity of
approximately 264 million gallons per day and the present capacity for taking
purchased water is approximately 174 million gallons per day. The gravity water
collection system has a physical delivery capacity of approximately 25 million
gallons per day. During 2002, a maximum and average of 216 million gallons and
138 million gallons of water per day, respectively, were delivered to the
system.
San Jose Water Company holds all its principal properties in fee,
subject to current tax and assessment liens, rights-of-way, easements, and
certain minor clouds or defects in title which do not materially affect their
use.
SJW Land Company owns approximately seven acres of property adjacent to
San Jose Water Company's general office facilities, approximately five
undeveloped acres of land and commercial properties in the San Jose metropolitan
area. The majority of the land adjacent to San Jose Water Company is used as
surface parking facilities and generates approximately 54% of SJW Land Company's
revenue. Under a ten-year lease expiring January 1, 2010, San Jose Water Company
leased half of the office space of SJW Land Company's 1265 South Bascom Avenue
building as its engineering headquarters. Approximately 26% of SJW Land
Company's revenue is generated from this commercial building. SJW Land Company
also owns a 70% limited partnership interest in 444 West Santa Clara, L.P., a
real estate limited partnership that owns and operates an office building.
Item 3. Legal Proceedings
Please see the heading "Competition and Condemnation" under Item 1,
"Business" for potential eminent domain complaint.
Item 4. Submission of Matters to a Vote of Security Holders
None.
8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Market Information
Exchange
SJW Corp.'s common stock is traded on the American Stock Exchange under
the symbol "SJW".
High and Low Sales Prices
The information required by this item as to the high and low sales
prices for SJW Corp.'s common stock for each quarter in the 2002 and 2001 fiscal
years is contained in the section captioned "Market Price Range of Stock" in the
tables set forth in Note 14 of "Notes to Consolidated Financial Statements" in
Part II, Item 8.
(b) Holders
There were 732 record holders of SJW Corp.'s common stock on December
31, 2002.
(c) Dividends
Quarterly dividends have been paid on SJW Corp.'s and its predecessor's
common stock for 237 consecutive quarters and the quarterly rate has been
increased during each of the last 35 years. The information required by this
item as to the cash dividends paid on common stock in 2002 and 2001 is contained
in the section captioned "Dividends per share" in the tables set forth in Note
14 of "Notes to Consolidated Financial Statements" in Part II, Item 8. Future
dividends will be determined by the Board of Directors after consideration of
various financial, economic and business factors.
9
Item 6. Selected Financial Data
FIVE YEAR STATISTICAL REVIEW
SJW CORP. AND SUBSIDIARIES
2002 2001 2000 1999 1998
-------------- ------------ ------------ ----------- -----------
Consolidated Results of Operations (in thousands)
Operating revenue ...................................... $ 145,652 136,083 123,157 117,001 106,010
Operating expense:
Operation ............................................. 89,137 84,156 76,622 69,264 57,454
Maintenance ........................................... 7,866 7,090 6,881 6,638 6,909
Taxes ................................................. 14,078 11,770 11,496 12,713 13,206
Depreciation and amortization ......................... 14,013 13,240 11,847 10,235 9,594
---------- ------- ------- ------- -------
Total operating expense ............................. 125,094 116,256 106,846 98,850 87,163
---------- ------- ------- ------- -------
Operating income ....................................... 20,558 19,827 16,311 18,151 18,847
Interest expense, other income and deductions .......... 6,326 5,810 5,646 2,267 2,829
---------- ------- ------- ------- -------
Net income ............................................. 14,232 14,017 10,665 15,884 16,018
Dividends paid ......................................... 8,405 7,834 7,491 7,379 7,419
---------- ------- ------- ------- -------
Invested in the business ............................... $ 5,827 6,183 3,174 8,505 8,599
========== ======= ======= ======= =======
Consolidated Per Share Data
Net income ............................................. $ 4.67 4.60 3.50 5.20 5.05
Dividends paid ......................................... $ 2.76 2.57 2.46 2.40 2.34
Shareholders' equity at year-end ....................... $ 50.41 49.05 47.40 47.25 45.19
Consolidated Balance Sheet (in thousands)
Utility plant and intangible assets .................... $ 541,919 507,227 462,892 432,262 403,227
Less accumulated depreciation and amortization ......... 161,576 149,721 139,396 129,828 122,809
---------- -------- -------- -------- --------
Net utility plant ................................... 380,343 357,506 323,496 302,434 280,418
---------- -------- -------- -------- --------
Nonutility property .................................... 10,487 10,309 9,979 10,133 11,360
Total assets ........................................... 453,223 431,017 391,930 372,427 359,380
Capitalization:
Shareholders' equity .................................. 153,499 149,354 144,325 143,894 143,149
Long-term debt ........................................ 110,000 110,000 90,000 90,000 90,000
---------- -------- -------- -------- --------
Total capitalization ................................ $ 263,499 259,354 234,325 233,894 233,149
========== ======== ======== ======== ========
Other Statistics -- San Jose Water Company
Customers at year-end .................................. 219,400 219,000 218,500 217,200 215,300
Average revenue per customer ........................... $ 652.79 612.78 556.99 534.98 489.40
Investment in utility plant per customer ............... $ 2,470 2,316 2,118 1,990 1,873
Miles of main at year-end .............................. 2,422 2,419 2,419 2,409 2,403
Water production (million gallons) ..................... 52,068 52,122 52,021 51,166 48,140
Maximum daily production (million gallons) ............. 216 199 217 207 218
Population served (estimate) ........................... 989,000 988,000 985,000 979,000 971,000
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Description of the Business:
SJW Corp. is a holding company with three subsidiaries.
San Jose Water Company, a wholly owned subsidiary, 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.
SJW Land Company, a wholly owned subsidiary, owns and operates a
750-space surface parking facility adjacent to the company's headquarters and
the HP Pavilion. SJW Land also owns commercial buildings and other undeveloped
land in the San Jose Metropolitan area, and a 70% limited partnership interest
in 444 West Santa Clara Street, L.P.
Crystal Choice Water Service LLC, a 75% owned limited liability
subsidiary formed in January 2001, engages in the sale and rental of water
conditioning and purification equipment.
SJW Corp. also owns 1,099,952 shares of California Water Service Group.
Critical Accounting Policies:
SJW Corp. has identified accounting policies below as the policies
critical to the business operations and the understanding of the results of
operations. The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and revenues and expenses. SJW Corp. bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. The impact and any associated risks related
to these policies on the company's business operations is discussed throughout
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" where such policies affect the company's reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see Note 1 of "Notes to Consolidated Financial
Statements". The company's critical accounting policies are as follows:
Balancing Account
The California Public Utilities Commission (CPUC) establishes a
balancing account mechanism within its regulatory regime. A separate balancing
account must be maintained for each offset expense item (e.g., purchased water,
purchased power and pump tax). The purpose of a balancing account is to track
the under-collection or over-collection associated with expense changes and the
revenue authorized by the CPUC to offset those expense changes. Since balances
are being tracked and have to be approved by the CPUC before they can be
incorporated into rates, San Jose Water Company has not recognized the balancing
account in its financial statements. Had the balancing account under-collection
been recognized in San Jose Water Company's financial statements, San Jose Water
Company's earnings would have been increased by the amount of balancing account
under-collection. As of December 31, 2002, the balancing account had a net
under-collected balance of $262,000. Please also see "Factors That May Affect
Future Results".
Accrued Unbilled Revenue
San Jose Water Company reads the majority of its customers' meters on a
bi-monthly basis and records its revenue based on its meter reading results.
Revenues from the meter reading date to the end of the accounting period is
estimated based on historical usage patterns, production records and the
effective tariff rates. The estimate of the unbilled revenue is a management
estimate utilizing certain sets of assumptions and conditions which include the
number of days between meter reads for each billing cycle, the customers'
consumption changes, and the company's experiences in unaccounted-for water.
Actual results could differ from those estimates, which would result in
operating revenue being adjusted in the period that the revision to the
Company's estimates is determined. As of December 31, 2002 and 2001, accrued
unbilled revenue was $6,605,000 and $7,000,000, respectively.
11
Recognition of Regulatory Assets and Liabilities
Generally accepted accounting principles for water utilities include
the recognition of regulatory assets and liabilities as permitted by SFAS No.
71, "Accounting for the Effects of Certain Types of Regulation". In accordance
with SFAS No. 71, San Jose Water Company records deferred costs and credits on
the balance sheet as regulatory assets and liabilities when it is probable that
these costs and credits will be recovered in the ratemaking process in a period
different from when the costs and credits were incurred. Accounting for such
costs and credits is based on management's judgments that it is probable that
these costs will be recoverable in the future revenue of the company through the
ratemaking process. The regulatory assets and liabilities recorded by San Jose
Water Company primarily relate to the recognition of deferred income taxes for
ratemaking versus tax accounting purposes. The disallowance of any asset in
future ratemaking purposes, including the deferred regulatory assets, would
require San Jose Water Company to immediately recognize the impact of the costs
for financial reporting purposes.
Income Taxes
SJW Corp. estimates its federal and state income taxes as part of the
process of preparing the financial statements. The process involves estimating
the actual current tax exposure together with assessing temporary differences
resulting from different treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included within the balance sheet. In the event that actual results differ from
these estimates, the provision for income taxes could be materially impacted.
Pension Accounting
San Jose Water Company offers a defined benefit plan, Supplemental
Executive Retirement Plan and certain post-retirement benefits other than
pensions to employees retiring with a minimum level of service. Accounting for
pensions and other post-retirement benefits requires an extensive use of
assumptions about the discount rate, expected return on plan assets, the rate of
future compensation increase received by the employees, mortality, turnover and
medical costs. See assumptions and disclosures detailed in Note 11 of "Notes to
Consolidated Financial Statements".
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, 2002, the plan assets
consist of 30% bonds, 10% cash and 60% equities. Furthermore, equities are to be
diversified by industry groups to balance for capital appreciation and income.
In addition, all investments are publicly traded. The company uses an expected
rate of return on plan assets of 8% in its actuarial computation that is below
the company's annualized actual rate of return of 10.5% measured from 1984
through 2002. The distributions of assets are conservative and are less affected
by market volatility. Furthermore, foreign assets are not included in the
investment profile and thus a risk related to foreign exchange fluctuation is
eliminated.
The market values of the plan assets are marked to market at the
measurement date. The investment trust assets suffered significant unrealized
market losses in the last two years. Significant unrealized market losses on
pension assets are amortized over 14 years for actuarial expense calculation
purposes. Market losses in 2001 increased expense by approximately $700,000 in
2002.
The San Jose Water Company utilizes Moody's 'A' and 'Aa' rated bonds in
industrial, utility and financial sectors with outstanding amount of $1 million
or more in determining the discount rate used in calculating the liabilities at
the measurement date. For the year ending December 31, 2002, the composite
discount rate used was 6.75%.
12
Results of Operations:
SJW Corp.'s consolidated net income for twelve months ending December
31, 2002 was $14,232,000, an increase of $215,000 or 2% from $14,017,000 for the
same period in 2001.
Consolidated Operating Revenue
2002 2001 2000
----------- --------- ----------
(in thousands)
San Jose Water Company ............... $143,092 134,047 121,339
SJW Land Company ..................... 1,860 1,752 1,818
Crystal Choice Water Service ......... 700 284 --
-------- ------- -------
$145,652 136,083 123,157
======== ======= =======
Consolidated operating revenue for 2002 increased by $9,569,000 or 7%
over 2001 mainly due to two rate increases in the period from January through
July 2002. This resulted from San Jose Water Company's latest general rate case
application and an offset rate increase for production costs adjustments in July
2002. SJW Land Company's parking revenue increased slightly and is largely due
to the level of events and activities at the HP Pavilion which is located
adjacent to its parking facility. Crystal Choice Water Service's revenue
increased $416,000 or 146% over 2001 due to improved marketing strategy.
Consolidated operating revenue for 2001 increased $12,926,000 or 10%
over 2000 mainly due to rate increases from San Jose Water Company's general
rate case application in April 2001 and an offset rate increase for production
costs adjustments in July 2001.
The change in consolidated operating revenue was due to the following
factors:
2002 vs 2001 2001 vs 2000
Increase/(decrease) Increase/(decrease)
--------------------- --------------------
(in thousands)
Utility:
Consumption changes .................. $ (198) -- $ 1,088 1%
New customers increase ............... 89 -- 721 --
Rate increases ....................... 9,154 7% 10,899 9%
Parking and rental ................... 108 -- (66) --
Crystal Choice Water Service ......... 416 -- 284 --
------- -- ------- --
$ 9,569 7% $12,926 10%
======= == ======= ==
Pursuant to a CPUC authorized regulatory adjustment on previously
capitalized interest on utility plant under construction, San Jose Water Company
refunded $531,000 and $541,000 in 2002 and 2001 respectively, of revenue to
customers which was accrued in 2000.
The following table represents revenues by customer group of San Jose
Water Company:
Revenue by Customer Group
2002 2001 2000
-------- ------- -------
(in thousands)
Residential and Business .............. $130,784 122,345 111,032
Industrial ............................ 1,060 1,017 1,123
Public Authorities .................... 8,174 7,827 6,861
Other metered and non-metered ......... 3,074 2,858 2,323
-------- ------- -------
$143,092 134,047 121,339
======== ======= =======
13
Consolidated Operating Expense Before Income Taxes
2002 2001 2000
-------- ------- -------
(in thousands)
San Jose Water Company ............... $112,929 105,767 94,174
SJW Land Company ..................... 797 742 713
Crystal Choice Water Service ......... 1,052 778 --
SJW Corp. ............................ 658 1,578 4,550
-------- ------- ------
$115,436 108,865 99,437
======== ======= ======
The change in consolidated operating expense, excluding income taxes,
was due to the following:
2002 vs 2001 2001 vs 2000
Increase/(decrease) Increase/(decrease)
--------------------- ------------------------
(in thousands)
Production costs:
(Increased)/decreased surface water supply . $ (250) -- $ 2,111 2%
Usage and new customers .................... (382) -- 1,028 1%
Pump tax and purchased water price increase 1,910 1% 3,796 4%
Energy price increase ...................... 344 -- 3,456 3%
------- -- -------- -
Total production costs ..................... 1,622 1% 10,391 10%
Other operating expense ....................... 3,359 3% (2,857) (3)%
Maintenance ................................... 776 1% 209 --
Property taxes and other nonincome taxes ...... 41 -- 292 --
Depreciation and amortization ................. 773 1% 1,393 2%
------- -- -------- ----
$ 6,571 6% $ 9,428 9%
======= == ======== ====
The increase in production costs was primarily due to an increase in
Santa Clara Valley Water District (SCVWD) water production rates (pump tax and
purchased water) in July 2002, and energy cost increases. Water production,
however, was similar to 2001, and was consistent with the changes in customer
consumption. Additional energy costs were also incurred due to the scheduled
maintenance of a SCVWD treatment plant, altering the company's distribution mix
and optimal pumping pattern for 2002.
San Jose Water Company's water supply is obtained from wells, surface
run-off and diversion and by purchases from the SCVWD. Surface water supply is
the least expensive source of water and the availability of a slightly higher
surface water supply reduced water production costs in 2002. During the year,
San Jose Water Company purchased more imported water than pumped water, which
became more expensive as a result of an increase in energy costs.
Consolidated operating expense in 2002, excluding income taxes and
production costs, increased $4,949,000 compared to 2001. The increases included
$1,273,000 in pension costs primarily as a result of the decline in the market
value of retirement trust assets, $1,308,000 in salaries and wages in accordance
with bargaining unit wage escalation and new hires, $598,000 in additional
professional fees and $723,000 in insurance costs. Depreciation increased
$773,000 due to higher investment in utility plants.
Consolidated operating expense in 2001, excluding income taxes,
increased $9,428,000, or 9%, in comparison with 2000 due primarily to reduced
surface water supply, the SCVWD production cost (pump tax and purchased water)
price increases in July 2001, and the energy provider's power cost increases.
Power cost increased 90% in 2001 over 2000 due primarily to the energy
provider's price increases in January and March of 2001. San Jose Water Company
received a corresponding rate increase associated with the water production and
energy cost increases effective in July 2001. Additional energy costs were also
incurred due to the scheduled maintenance of a SCVWD treatment plant which
altered the company's distribution mix and optimal pumping pattern. Increases in
operation and maintenance expenses for the year ended 2001 were more than offset
by the reduction in the merger-related costs
14
incurred in the year ended 2000 and the regulatory adjustment authorized by the
CPUC. The merger-related costs were incurred in conjunction with the proposed
merger of SJW Corp. with American Water Works Company, Inc. The proposed merger
was terminated on March 1, 2001. Depreciation expense increased due to additions
to the utility assets.
Sources of Supply
2002 2001 2000
-------- -------- ---------
(million gallons)
Purchased water ......... 30,566 27,833 27,494
Ground water ............ 18,430 21,368 19,788
Surface water ........... 2,661 2,515 4,381
Reclaimed water ......... 411 406 358
------ ------ ------
52,068 52,122 52,021
====== ====== ======
Water production in 2002 decreased 54 million gallons from 2001. During
2002, San Jose Water Company purchased more imported water to substitute for
pumped water which became more expensive as a result of an increase in energy
costs. Water production in 2001 increased 101 million gallons over 2000. The
changes are consistent with the related operating expenses.
Income Tax Expense:
Income tax expense increased $2,267,000, or 31%, in comparison to 2001
due to tax benefits associated with certain merger related expenses in 2001.
The effective consolidated income tax rates for 2002, 2001 and 2000
were 40%, 35% and 41%, respectively. The 2001 effective tax rate was below the
rates for the prior years due to tax benefits associated with certain
merger-related expenses. Refer to Note 5 of "Notes to Consolidated Financial
Statements" for the reconciliation of income tax expense to the amount computed
by applying the federal statutory rate to income before income taxes.
Other Income and Expense:
Interest expense increased $1,066,000, or 16%, due to issuance of
Series F senior notes in September 2001, partially offset by lower short term
borrowing in 2002. SJW Corp.'s weighted average cost of long-term debt,
including amortization of debt issuance costs, was 7.9% for the years ended
December 31, 2002 and 2001, and 8.0% for the year ended December 31, 2000.
The 2002 dividend income increased $6,000, over 2001 due to a $.005 per
share increase in the California Water Service Group annual dividend.
Other comprehensive loss in 2002 was $1,682,000 which included an
adjustment of $1,363,000 on the decline in the market value of investment in
California Water Service Group, and an increase of $319,000 in minimum pension
liability of the pension plans primarily due to the decline in market value of
the retirement trust assets.
15
Liquidity and Capital Resources:
San Jose Water Company's budgeted capital expenditures for 2003,
exclusive of capital expenditures financed by customer contributions and
advances, are as follows:
Budgeted Capital
Expenditures
2003
--------------------
(in thousands)
Water treatment ..................... $ 1,585 5%
Reservoirs and tanks ................ 3,968 14%
Pump stations and equipment ......... 2,732 10%
Distribution system ................. 17,297 60%
Equipment and other ................. 3,085 11%
------- --
$28,667 100%
======= ===
The 2003 capital expenditures budget is concentrated in main
replacements. Approximately $13,000,000 will be spent to replace San Jose Water
Company's aging mains.
Starting in 1997, San Jose Water Company began a four-phased
Infrastructure Study establishing a systematic approach to replace its utility
facilities. Phase IV was completed in July of 2002. 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 will be used as
a guide for future capital improvement programs, and serve as the master plan
for the company's replacement program for the next 20 years.
San Jose Water Company's capital expenditures are incurred in
connection with normal upgrading and expansion of existing facilities and to
comply with environmental regulations. San Jose Water Company expects to incur
approximately $155,000,000, exclusive of customer contributions and advances, in
capital expenditures over the next five years. The company's actual capital
expenditures may vary from its projections due to changes in the expected demand
for services, weather patterns, and actions by governmental agencies and general
economic conditions. Total additions to utility plant normally exceed
company-financed additions by several million dollars because certain new
facilities are constructed using advances from developers and contributions in
aid of construction.
A substantial portion of San Jose Water Company's distribution system
was constructed during the period from 1945 to 1980. Expenditure levels for
renewal and modernization of this part of the system will grow at an increasing
rate as these components reach the end of their useful lives. In most cases,
replacement cost will significantly exceed the original installation cost of the
retired assets due to increases in the costs of goods and services.
In 2002, SJW Corp. invested $287,000 in Crystal Choice Water Service
LLC related to its 75% share of capital investment. The capital is invested
primarily in rental equipment used by Crystal Choice Water Service LLC in its
rental operation.
The water utility business is highly seasonal in nature. Customer
consumption demand during summer months could significantly exceed that of
winter months. Operating revenue, accounts receivable and unbilled revenue
increase as customer consumption increases. Historically, San Jose Water
Company's write-offs for uncollectible accounts represent less than 1% of its
total revenue. Management believes it can continue to collect its accounts
receivable balances at its historical collection rate.
Sources of Capital:
San Jose Water Company's ability to finance future construction
programs and sustain dividend payments depends on its ability to attract
external financing and maintain or increase internally generated funds. The
level of future earnings and the related cash flow from operations is dependent,
in large part, upon the timing and outcome of regulatory proceedings.
San Jose Water Company has outstanding $110,000,000 of unsecured senior
notes as of December 31, 2002. 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
16
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 December 31, 2002, San Jose Water Company's funded debt was 41.8%
of total capitalization and the net income available for interest charges was
444% of interest charges.
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.
In 2002, the Department of Water Resources approved San Jose Water
Company's application for an approximately $2,500,000 Safe Drinking Water State
Revolving Fund twenty-year loan at an interest rate of approximately 2.39%.
Funds in the above amount will be received for the retrofit of San Jose Water
Company's water treatment plant. San Jose Water Company will request the funding
in 2003 as soon as all the loan documentation and contract requirements are met.
SJW Corp. and its subsidiaries have unsecured lines of credit available
allowing aggregate short-term borrowings of up to $30,000,000 at rates that
approximate the bank's prime or reference rate. At December 31, 2002, SJW Corp.
and its subsidiaries had available unused short-term bank lines of credit of
$18,550,000. Cost of borrowing averaged 3.10% for the twelve months of 2002. The
line of credit expires on August 1, 2003.
SJW Corp.'s contractual obligation and combined commitments as of
December 31, 2002 are as follows:
Contractual Obligations
(dollars in thousands)
Due in
----------------------------------------------
Less than 1-5 After
Total 1 year Years 5 Years
----------- ----------- ------- --------
Long-Term Debt ............................. $110,000 -- -- 110,000
-------- -- -- -------
Total Contractual Cash Obligations ......... $110,000 -- -- 110,000
======== == == =======
Other Commercial Commitments
(dollars in thousands)
Due in
--------------------------------------------------
Total Amounts Less than 1-3 Over
Committed 1 year Years 3 Years
--------------- ----------- ------- --------
Line of Credit ....................... $30,000 30,000 -- --
------- ------ -- --
Total Commercial Commitments ......... $30,000 30,000 -- --
======= ====== == ==
In addition, San Jose Water Company purchases water from Santa Clara
Valley Water District (SCVWD). Delivery schedules for purchased water are based
on a contract year beginning July 1, and are negotiated every three years under
terms of a master contract with SCVWD expiring in 2051. Based on current prices
and estimated deliveries, San Jose Water Company expects to purchase a minimum
of 90% of the delivery schedule, or 19,300 million gallons ($24,900,000) of
water, from SCVWD in the contract year ending June 30, 2003.
Off Balance Sheet Arrangement:
SJW Corp.'s financial statements include the accounts of SJW Corp. and
its wholly owned and majority-owned subsidiaries. SJW Land Company has a 70%
limited partnership interest in a real estate investment partnership, 444 West
Santa Clara Street, L.P. The limited partnership obtained a mortgage loan in the
amount of $4,500,000 in 2001. The mortgage loan is non-recourse to SJW Land
Company.
Related Party Transactions:
SJW Land Company has a 70% limited partnership interest in a real
estate limited partnership, 444 West Santa Clara Street, L.P. A real estate
development firm, which is partially owned by an individual who also serves as a
director of SJW Corp., owns the remaining 30% partnership interest. A commercial
17
building is constructed on the partnership property and is leased to an
international real estate firm under a twelve-year long-term lease. The
partnership is being accounted for under the equity method of accounting.
Factors That May Affect Future Results:
The business of SJW Corp. and its subsidiaries may be adversely
affected by new and changing legislation, policies and regulations.
New legislation and changes in existing legislation by federal, state
and local governments and administrative agencies can affect the operations of
SJW Corp. and its subsidiaries. San Jose Water Company is regulated by the
California Public Utilities Commission (CPUC). Almost all the operating revenue
of San Jose Water Company results from the sale of water at rates authorized by
the CPUC. The CPUC sets rates that are intended to provide revenues sufficient
to recover operating expenses and produce a reasonable return on common equity.
San Jose Water Company files and processes general rate applications with the
CPUC on a periodic basis. The most recent rate decision relating to San Jose
Water Company, approved in April 2001, authorized a return on common equity in
2001, 2002 and 2003 of 9.95%. We believe this is within the range of recent
rates of return authorized by the CPUC for water utilities. Pursuant to this
rate decision, San Jose Water Company received a 3% rate increase effective
January 1, 2003. San Jose Water Company will file a rate application in 2003 for
rates scheduled to become effective in 2004, 2005 and 2006. Although the company
believes that the rates currently in effect provide it with a reasonable rate of
return, there is no guarantee such rates will be sufficient to provide a
reasonable rate of return in the future. There is no guarantee that the
company's future rate filings will be able to obtain a satisfactory rate of
return in a timely manner.
In addition, San Jose Water Company relies on policies and regulations
promulgated by the CPUC in order to, for example, recover capital expenditures,
maintain favorable treatment on gains from the sale of real property, offset its
production and operating costs, recover the cost of debt, maintain an optimal
equity structure without over-leveraging, and have financial and operational
flexibility to engage in non-regulated operations. If the CPUC implements
policies and regulations that do not allow San Jose Water Company to accomplish
some or all of the items listed above, San Jose Water Company's operating
results may be adversely affected.
Pursuant to Section 792.5 of the California Public Utilities Code, a
balancing account must be kept for each expense item for which revenue offsets
have been authorized (i.e., 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. On November 29, 2001, the CPUC issued
Resolution W-4294 (Resolution) implementing significant changes in the
long-established offset rate increase and balancing account recovery procedures
applicable to water utilities. These changes could have a significant impact on
the risk profile of the water industry.
As required by the Resolution, in December 2001, the Commission opened
an Order Instituting Rulemaking (OIR) to evaluate existing balancing account and
offset rate practices and policies. On December 17, 2002, the CPUC issued an
interim OIR decision addressing the procedures for recovery of balancing
accounts existing prior to November 29, 2001. Pursuant to the decision,
utilities may recover the balancing account balances accrued prior to November
29, 2001 if the utility is not over-earning as measured on a pro-forma basis.
The utilities are required to file a request for such recovery before March 17,
2003. At this time, it is unclear whether San Jose Water Company's ability to
recover all of the balancing account balance of $373,000 accrued prior to
November 29, 2001 will be impacted. Furthermore, it is uncertain how any future
CPUC regulation dealing with balancing account balances accrued after November
29, 2001 will affect San Jose Water Company's ability to collect this balance or
to receive future offset rate relief. For the period from November 29, 2001 to
December 31, 2002, the balancing account accumulated an over-collection of
$111,000 to be refunded to the customers.
18
Changes in water supply, water supply costs or the mix of water supply
could adversely affect the operating results and business of San Jose Water
Company.
San Jose Water Company's supply of water primarily relies upon three
main sources: water purchased from the Santa Clara Valley Water District
(SCVWD), surface water from its Santa Cruz Mountain Watershed, and pumped
underground water. Changes and variations in quantities from each of these three
sources affects the overall mix of the water supply, therefore affecting the
cost of water supply. Surface water is the least costly source of water. If
there is an adverse change to the mix of water supply and San Jose Water Company
is not allowed to recover the additional or increased water supply costs, its
operating results may be adversely affected.
The SCVWD receives an allotment of water from state and federal water
projects. If San Jose Water Company has difficulties obtaining a high quality
water supply from the SCVWD due to availability and legal restrictions, it may
not be able to satisfy customer demand in its service area and its operating
results and business may be adversely affected. Additionally, the availability
of water from San Jose Water Company's Santa Cruz Mountain Watershed depends on
the weather and fluctuates with each season. In a normal year, surface water
supply provides 6-8% of the total water supply of the system. In a dry season
with little rainfall, water supply from surface water sources may be low,
thereby causing San Jose Water Company to increase the amount of water purchased
from outside sources at a higher cost than surface water and thus increasing
water production costs.
In addition, San Jose Water Company's ability to use surface water is
subject to regulations regarding water quality and volume limitations. If new
regulations are imposed or existing regulations are changed or given new
interpretations, the availability of surface water may be materially reduced. A
reduction in surface water could result in the need to procure more costly water
from other sources, thereby increasing the water production costs and adversely
affecting the operating results of San Jose Water Company.
Because the extraction of water from the groundwater basin and the
operation of the water distribution system requires a significant amount of
energy, increases in energy prices could increase operating expenses of San Jose
Water Company.
San Jose Water Company continues to utilize Pacific Gas & Electric's
time of use rate schedules to minimize its overall energy costs primarily for
groundwater pumping. During the winter months, typically 90% or more of the
groundwater is produced during off-peak hours when electrical energy is the
cheapest. Optimization and energy management efficiency is achieved through the
implementation of Supervisory Control And Data Acquisition (SCADA) software
applications that control pumps run based on demand and cost of energy. In the
aftermath of the attempt to deregulate the California energy market, energy
costs still remain in flux, with resulting uncertainty in the Company's ability
to contain energy costs into the future.
Fluctuations in customer demand for water due to seasonality,
restrictions of use, weather and lifestyle can adversely affect operating
results.
San Jose Water Company operations are seasonal. Thus, results of
operations for one quarter do not indicate results to be expected in next
quarter. Rainfall and other weather conditions also affect the operations of San
Jose Water Company. Most water consumption occurs during the third quarter of
each year when weather tends to be warm and dry. In drought seasons, if
customers are encouraged and required to conserve water due to a shortage of
water supply or restriction of use, revenue tends to be lower. Similarly, in
unusually wet seasons, water supply tends to be higher and customer demand tends
to be lower, again resulting in lower revenues. Furthermore, certain lifestyle
choices made by customers can affect demand for water. For example, a
significant portion of residential water use is for outside irrigation of lawns
and landscaping. If there is a decreased desire by customers to maintain
landscaping for their homes, residential water demand could decrease, which may
result in lower revenues.
A contamination event or other decline in source water quality could
affect the water supply of San Jose Water Company and therefore adversely affect
the business and operating results.
San Jose Water Company is subject to certain water quality risks
relating to environmental regulations. Through water quality compliance
programs, San Jose Water Company continually monitors
19
for contamination and pollution of its sources of water. In the event of a
contamination, San Jose Water Company will likely have to procure water from
more costly sources and increase future capital expenditures. Although the costs
would likely be recovered in the form of higher rates, there can be no assurance
that CPUC would approve a rate increase to recover the costs.
San Jose Water Company is subject to litigation risks concerning water
quality and contamination.
Although San Jose Water Company has not been and is not a party to any
environmental and product-related lawsuits, it believes such lawsuits against
other water utilities have increased in frequency in recent years. If San Jose
Water Company is subject to an environmental or product-related lawsuit, it
might incur significant legal costs and it is uncertain whether it would be able
to recover the legal costs from ratepayers or other third parties. In addition,
if current California law regarding CPUC's preemptive jurisdiction over
regulated public utilities for claims about compliance with Department of Health
Services (DHS) and Environmental Protection Agency (EPA) water quality standards
changes, the legal exposure of San Jose Water Company may be significantly
increased.
Changes of or more stringent environmental regulations could increase
San Jose Water Company's operating costs and affect its business.
San Jose Water Company's operations are subject to water quality and
pollution control regulations issued by the EPA, the DHS and the California
Regional Water Quality Control Board. It is also subject to environmental laws
and regulations administered by other state and local regulatory agencies.
Stringent environmental and water quality regulations could increase
San Jose Water Company's water quality compliance costs, hamper San Jose Water
Company's available water supplies, and increase future capital expenditure.
Under the federal Safe Drinking Water Act (SDWA), San Jose Water
Company is subject to regulation by the EPA of the quality of water it sells and
treatment techniques it uses to make the water potable. The EPA promulgates
nationally applicable standards, including maximum contaminant levels (MCLs) for
drinking water. San Jose Water Company is currently in compliance with all of
the 87 primary MCLs promulgated to date. There can be no assurance that San Jose
Water Company will be able to continue to comply with all water quality
requirements.
San Jose Water Company has implemented monitoring activities and
installed specific water treatment improvements enabling it to comply with
existing MCLs and plan for compliance with future drinking water regulations.
However, the EPA and DHS have continuing authority to issue additional
regulations under the SDWA. It is possible that new or more stringent
environmental standards could be imposed that will raise San Jose Water
Company's operating costs. Future drinking water regulations may require
increased monitoring, additional treatment of underground water supplies,
fluoridation of all supplies, more stringent performance standards for treatment
plants and procedures to further reduce levels of disinfection byproducts. San
Jose Water Company continues to seek to establish mechanisms for recovery of
government-mandated environmental compliance costs. There are currently limited
regulatory mechanisms and procedures available to the company for the recovery
of such costs and there can be no assurance that such costs will be fully
recovered.
Costs associated with security precautions may have an adverse effect
on the operating results of San Jose Water Company.
Water utility companies have generally been on a heightened state of
alert since the threats to the nation's health and security in the fall of 2001.
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, pump stations and company buildings. San
Jose Water Company also coordinates security and planning information with
SCVWD, other Bay Area water utilities and various governmental and law
enforcement agencies.
San Jose Water Company is in the final stage of completing a
system-wide vulnerability assessment in compliance with federal regulations
imposed on all water utilities. This assessment is required
20
to be completed by March 31, 2003. San Jose Water Company has also actively
participated in the security vulnerability assessment training offered by the
American Water Works Association Research Foundation and the EPA.
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. While some of these costs are likely to be recovered in the
form of higher rates, there can be no assurance that the CPUC will approve a
rate increase to recover such costs, and as a result, the Company's operating
results and business may be adversely affected.
Other factors that could adversely affect the operating results of SJW
Corp. and its subsidiaries include the following:
* The level of labor and non-labor operating and maintenance
expenses as affected by inflationary forces and collective
bargaining power could adversely affect the operating and
maintenance expenses of SJW Corp.
* The City of Cupertino's lease operation could be adversely
affected by capital requirements, the ability of San Jose
Water Company to raise rates through the Cupertino City
Council, and the level of operating and maintenance expenses.
* The wide acceptance of recycled water as substitute to potable
water and the ability of San Jose Water Company to retain its
legal right to serve its customers recycled water would impact
its sales, revenue and operating results.
* SJW Land Company's expenses and operating results also could
be adversely affected by the parking lot activities, the HP
Pavilion at San Jose events, ongoing local, state and federal
land use development activities and regulations, future
economic conditions, and the development and fluctuations in
the sale of the undeveloped properties.
Other trends and development
* Pension accruals increased $1,273,000 in 2002 primarily due to
the decline in valuation of the retirement plan portfolio.
Market conditions, not changes in operating risk or loss
experience, was the sole reason for the average liability
insurance cost increase of 30% in 2002 after adjustments in
self-insured retentions. Medical, liability and pension
expenses are expected to continue to have similar increases in
2003.
Nonregulated Operations
On October 8, 2002, SJW Land Company, a wholly owned subsidiary of SJW
Corp., entered into an agreement with the Santa Clara Valley Water District
(SCVWD) whereby SJW Land Company will sell to the SCVWD the San Tomas station, a
nonutility property, at a contract price of $5,400,000. The transaction is
expected to be completed in March 2003. The sale is expected to result in a gain
of approximately $3,163, net of income tax expense of $2,198, which is to be
included in 2003. The company will reinvest the proceeds in other commercial
properties.
In January 2002, SJW Land Company entered into an Agreement for
Possession and Use (Agreement) with the 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 has adopted a resolution authorizing a condemnation
proceeding to acquire the land and has deposited $3.7 million in an escrow
account as fair market compensation. SJW Land Company waived the right to
challenge VTA's possession and use in any subsequent eminent domain proceeding
but reserved the right to assert, and has disputed, the fair market value placed
on the land. According to the terms of the Agreement, if a settlement is not
reached within three months of the execution of the Agreement, VTA can file an
eminent domain complaint to acquire title to the parking lot property. As of
January 29, 2003, VTA has not filed a complaint and SJW Land Company continues
to negotiate in good faith with VTA over the fair market value. This transaction
will be recognized and is expected to result in an increase to net income, if
and when the compensation issue is settled or a final court order is rendered.
21
Impact of Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations", which applies to legal obligations that are
associated with the retirement of long-lived assets and the associated asset
retirement costs. The statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002. SJW Corp. does not anticipate that
the adoption of SFAS No. 143 will have a material effect on SJW Corp.'s
financial condition and results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". Among other provisions, SFAS No. 145 rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt". Accordingly, gains or
losses from extinguishment of debt shall not be reported as extraordinary items
unless the extinguishment qualifies as an extraordinary item under the criteria
of APB No. 30. Gains or losses from extinguishment of debt that do not meet the
criteria of APB No. 30 should be reclassified to income from continuing
operations in all prior periods presented. SFAS No. 145 is effective for fiscal
years beginning after May 15, 2002. SJW Corp. does not anticipate that the
adoption of SFAS No. 145 will have a material effect on SJW Corp.'s financial
condition and results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, a plant closing, or other exit or disposal activities.
The provisions of this statement are effective for exit and disposal activities
that are initiated by a company after December 31, 2002. SJW Corp. does not
anticipate that the adoption of SFAS No. 146 will have a material effect on SJW
Corp.'s financial condition and results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure". This statement amends
FASB No. 123, "Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. It also amends the disclosure
provisions to require prominent disclosures pertaining to the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. SFAS No. 148 is effective for SJW Corp. for
December 31, 2002. Since SJW Corp. has not granted any stock options under its
plan, the adoption of SFAS No. 148 will not have a material effect on SJW
Corp.'s financial condition and results of operations.
Item 7a. 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. 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 changes
in market rates and prices.
22
Item 8. Financial Statements and Supplementary Data
Independent Auditors' Report
The Shareholders and Board of Directors
SJW Corp.
We have audited the accompanying consolidated balance sheets of SJW
Corp. and subsidiaries (the Company) as of December 31, 2002 and 2001, and the
related consolidated statements of income and comprehensive income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2002. In connection with our audits of the
consolidated financial statements, we also have audited the accompanying
financial statement schedule. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SJW Corp.
and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Mountain View, California
January 30, 2003
23
SJW CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2002 2001
-------- -------
(in thousands, except
share and per share data)
ASSETS
UTILITY PLANT ............................................................................. $534,079 499,386
INTANGIBLE ASSETS ......................................................................... 7,840 7,841
-------- -------
541,919 507,227
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION ............................................ 161,576 149,721
-------- -------
380,343 357,506
-------- -------
NONUTILITY PROPERTY, NET .................................................................. 10,487 10,309
CURRENT ASSETS:
Cash and equivalents ..................................................................... 324 5,021
Accounts receivable:
Customers ............................................................................... 7,309 6,614
Other ................................................................................... 2,807 484
Accrued utility revenue .................................................................. 6,605 7,000
Materials and supplies, at average cost .................................................. 499 458
Prepaid expenses ......................................................................... 1,155 850
-------- -------
18,699 20,427
-------- -------
OTHER ASSETS:
Investment in California Water Service Group ............................................. 26,014 28,324
Investment in joint venture .............................................................. 1,144 1,199
Unamortized debt issuance and reacquisition costs ........................................ 3,493 3,658
Goodwill ................................................................................. 1,744 1,744
Regulatory assets ........................................................................ 6,013 5,567
Other .................................................................................... 5,286 2,283
-------- -------
43,694 42,775
-------- -------
$453,223 431,017
======== =======
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Shareholders' equity:
Common stock, $3.125 par value; authorized 6,000,000 shares;
issued 3,045,147 shares ............................................................... $ 9,516 9,516
Additional paid-in capital .............................................................. 12,357 12,357
Retained earnings ....................................................................... 128,242 122,415
Accumulated other comprehensive income .................................................. 3,384 5,066
-------- -------
153,499 149,354
Long-term debt ........................................................................... 110,000 110,000
-------- -------
263,499 259,354
-------- -------
CURRENT LIABILITIES:
Line of credit ........................................................................... 11,450 11,500
Accrued pump taxes and purchased water ................................................... 3,144 3,091
Purchased power .......................................................................... 1,219 1,584
Accounts payable ......................................................................... 381 422
Accrued interest ......................................................................... 3,244 3,136
Accrued taxes ............................................................................ 634 1,182
Refunds due to customers ................................................................. -- 531
Other current liabilities ................................................................ 3,528 2,713
-------- -------
23,600 24,159
-------- -------
DEFERRED INCOME TAXES ..................................................................... 27,670 24,611
UNAMORTIZED INVESTMENT TAX CREDITS ........................................................ 2,034 2,095
ADVANCES FOR CONSTRUCTION ................................................................. 70,597 64,057
CONTRIBUTIONS IN AID OF CONSTRUCTION ...................................................... 56,117 50,462
DEFERRED REVENUE .......................................................................... 1,350 1,387
OTHER NONCURRENT LIABILITIES .............................................................. 8,356 4,892
COMMITMENTS AND CONTINGENCIES .............................................................
-------- -------
$453,223 431,017
======== =======
See accompanying Notes to Consolidated Financial Statements.
24
SJW CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31,
--------------------------------------------
2002 2001 2000
------------ ------------- -------------
(in thousands, except
share and per share data)
OPERATING REVENUE ................................................ $ 145,652 136,083 123,157
OPERATING EXPENSE:
Operation:
Purchased water ............................................... 38,228 33,500 29,709
Power ......................................................... 6,805 7,814 4,121
Pump taxes .................................................... 18,950 21,047 18,140
Other ......................................................... 25,154 21,795 24,652
Maintenance ..................................................... 7,866 7,090 6,881
Property taxes and other nonincome taxes ........................ 4,420 4,379 4,087
Depreciation and amortization ................................... 14,013 13,240 11,847
Income taxes .................................................... 9,658 7,391 7,409
---------- ---------- ----------
125,094 116,256 106,846
---------- ---------- ----------
OPERATING INCOME ................................................. 20,558 19,827 16,311
OTHER (EXPENSE) INCOME:
Interest on long-term debt ...................................... (7,803) (6,737) (6,434)
Dividends ....................................................... 1,232 1,226 1,210
Other, net ...................................................... 245 (299) (422)
---------- ---------- ----------
NET INCOME .................................................... $ 14,232 14,017 10,665
========== ========== ==========
OTHER COMPREHENSIVE LOSS:
Unrealized loss on investment, net of taxes of $947 in 2002, $564
in 2001, and $1,493 in 2000 ................................... (1,363) (811) (2,150)
Minimum pension liability adjustment, net of taxes of $220 in
2002, $236 in 2001, and $407 in 2000 .......................... (319) (343) (593)
---------- ---------- ----------
Other comprehensive loss ...................................... (1,682) (1,154) (2,743)
---------- ---------- ----------
COMPREHENSIVE INCOME ......................................... $ 12,550 12,863 7,922
========== ========== ==========
BASIC EARNINGS PER SHARE ......................................... $ 4.67 4.60 3.50
========== ========== ==========
COMPREHENSIVE INCOME PER SHARE ................................... $ 4.12 4.22 2.60
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING .............................. 3,045,147 3,045,147 3,045,147
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
25
SJW CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Shareholders'
Stock Capital Earnings Income Equity
---------- ------------ ----------- --------------- --------------
(in thousands)
BALANCES, DECEMBER 31, 1999 ............. $ 9,516 12,357 113,058 8,963 143,894
Net income ............................. -- -- 10,665 -- 10,665
Other comprehensive loss
Unrealized loss on investment,
net of tax effect of $1,493 ......... -- -- -- (2,150) (2,150)
Minimum pension liability adjustment,
net of tax effect of $407 ........... -- -- -- (593) (593)
-------
Comprehensive income ................... -- -- -- -- 7,922
Dividends paid ......................... -- -- (7,491) -- (7,491)
------- ------ ------- ------ -------
BALANCES, DECEMBER 31, 2000 ............. 9,516 12,357 116,232 6,220 144,325
Net income ............................. -- -- 14,017 -- 14,017
Other comprehensive loss
Unrealized loss on investment,
net of tax effect of $564 ........... -- -- -- (811) (811)
Minimum pension liability adjustment,
net of tax effect of $236 ........... -- -- -- (343) (343)
-------
Comprehensive income ................. -- -- -- -- 12,863
Dividends paid ....................... -- -- (7,834) -- (7,834)
------- ------ ------- ------ -------
BALANCES, DECEMBER 31, 2001 ............. 9,516 12,357 122,415 5,066 149,354
Net income ............................. -- -- 14,232 -- 14,232
Other comprehensive loss
Unrealized loss on investment,
net of tax effect of $947 ........... -- -- -- (1,363) (1,363)
Minimum pension liability adjustment,
net of tax effect of $220 ........... -- -- -- (319) (319)
-------
Comprehensive income ................... -- -- -- -- 12,550
Dividends paid ......................... -- -- (8,405) -- (8,405)
------- ------ ------- ------ -------
BALANCES, DECEMBER 31, 2002 ............. $ 9,516 12,357 128,242 3,384 153,499
======= ====== ======= ====== =======
See accompanying Notes to Consolidated Financial Statements.
26
SJW CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
---------------------------------------
2002 2001 2000
----------- ----------- -----------
(in thousands)
OPERATING ACTIVITIES:
Net income ................................................ $ 14,232 14,017 10,665
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ........................... 14,013 13,240 11,847
Deferred income taxes and credits ....................... 2,998 1,993 (1,538)
Changes in operating assets and liabilities:
Accounts receivable and accrued utility
revenue .............................................. (2,623) (973) (545)
Accounts payable, purchased power and
other current liabilities ............................ 409 789 680
Accrued employee compensation .......................... -- (3,024) 2,404
Refund due to customers ................................ (531) (541) 1,072
Accrued pump taxes and purchased water ................. 53 (1,538) 1,557
Accrued taxes .......................................... (548) 916 (3,583)
Other changes, net ..................................... 1,088 575 1,475
--------- ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................. 29,091 25,454 24,034
--------- ------ ------
INVESTING ACTIVITIES:
Additions to utility plant ................................ (37,119) (47,672) (33,671)
Cost to retire utility plant, net of salvage .............. (1,352) (1,302) (678)
Additions to nonutility property .......................... (477) (330) (94)
--------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES ...................... (38,948) (49,304) (34,443)
--------- ------- -------
FINANCING ACTIVITIES:
Dividends paid ............................................ (8,405) (7,834) (7,491)
Repayment of line of credit ............................... (50,813) (61,075) (11,500)
Borrowings from line of credit ............................ 50,763 61,375 19,400
Advances and contributions in aid of construction ......... 15,242 17,246 12,276
Refunds of advances for construction ...................... (1,627) (1,624) (1,617)
Proceeds from issuance of long-term debt .................. -- 20,000 --
--------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................. 5,160 28,088 11,068
--------- ------- -------
NET CHANGE IN CASH AND EQUIVALENTS ......................... (4,697) 4,238 659
CASH AND EQUIVALENTS, BEGINNING OF YEAR .................... 5,021 783 124
--------- ------- -------
CASH AND EQUIVALENTS, END OF YEAR .......................... $ 324 5,021 783
========= ======= =======
Cash paid during the year for:
Interest .................................................. $ 7,782 7,730 7,413
Income taxes .............................................. $ 8,800 4,188 12,838
See accompanying Notes to Consolidated Financial Statements.
27
SJW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands, except share data)
Note 1. Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts
of SJW Corp. and its wholly owned and majority-owned subsidiaries. Intercompany
transactions and balances have been eliminated. A subsidiary in which SJW Corp.
has a controlling interest is consolidated in the financial statements with the
minority interest included as "other" in the Consolidated Statements of Income
and Comprehensive Income and in "other noncurrent liabilities" in the Balance
Sheet.
SJW Corp.'s principal subsidiary, San Jose Water Company, is a
regulated California water utility providing water service to the greater
metropolitan San Jose area. San Jose Water Company's accounting policies comply
with the applicable uniform system of accounts prescribed by the California
Public Utilities Commission (CPUC) and conform to generally accepted accounting
principles for rate-regulated public utilities. Approximately 91% of San Jose
Water Company's revenue is derived from the sale of water to residential and
business customers.
SJW Land Company owns and operates a 750-space surface parking facility
adjacent to the HP Pavilion, commercial properties in San Jose, a 70% limited
partnership interest in 444 West Santa Clara Street, L.P., and several
undeveloped real estate parcels in San Jose, California.
Crystal Choice Water Service LLC, a 75% majority-owned limited
liability subsidiary formed in January 2001, engages in the sale and rental of
water conditioning equipment in the metropolitan San Jose area.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Utility Plant
The cost of additions, replacements and betterments to utility plant is
capitalized. The amount of interest capitalized in 2002, 2001, and 2000 was
$603, $617, and $532, respectively. Construction in progress was $5,720, $9,303,
and $5,921, at December 31, 2002, 2001, and 2000, respectively.
Depreciation is computed using the straight-line method over the
estimated service lives of the assets, ranging from 5 to 75 years. For the years
2002, 2001, and 2000 the aggregate provisions for depreciation approximated
3.0%, 2.8%, and 2.7%, respectively, of the beginning of the year depreciable
plant. The cost of utility plant retired, including retirement costs (less
salvage), is charged to accumulated depreciation and no gain or loss is
recognized.
Rate-regulated enterprises are required to charge a regulatory asset to
earnings if and when that asset no longer meets the criteria for being recorded
as a regulatory asset. In 2000, San Jose Water Company included in its operating
expense a regulatory adjustment of $621 of previously capitalized interest on
utility plant under construction which was disallowed by the CPUC. The company
continually evaluates the recoverability of utility plant by assessing whether
the amortization of the balance over the remaining life can be recovered through
the expected and undiscounted future cash flows. SJW Corp. adopted Statement of
Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets". The adoption of SFAS No. 144 did not have a
material impact on SJW Corp.'s financial condition and results of operations.
28
SJW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001, and 2000 -- (Continued)
(Dollars in thousands, except share data)
Intangible Assets
Intangible assets consist of concession fees paid to the City of
Cupertino of $6,800 for operating the City of Cupertino municipal water system,
and other intangibles associated with the operation of San Jose Water Company.
All intangible assets are recorded at cost and are amortized using the
straight-line method over the legal or estimated economic life of the asset,
whichever is shorter, not to exceed 40 years. The company continually evaluates
the recoverability of intangible assets by assessing whether the amortization of
the balance over the remaining life can be recovered through the expected and
undiscounted future cash flows.
Nonutility Property
Nonutility property is recorded at cost and consists primarily of land,
buildings and parking facilities. Depreciation is computed using accelerated
depreciation methods over the estimated useful lives of the assets, ranging from
5 to 39 years.
Cash and Equivalents
Cash and equivalents include certain highly liquid investments with
remaining maturities of three months or less when purchased. Cash equivalents
are stated at cost plus accrued interest, which approximates fair value.
Financial Instruments
The carrying amount of SJW Corp.'s current assets and liabilities that
are considered financial instruments approximates their fair value as of dates
presented due to the short maturity of these instruments.
Investment in California Water Service Group
SJW Corp.'s investment in California Water Service Group is reported at
quoted market price, with the unrealized gain or loss reported as other
comprehensive income.
Comprehensive Income
The accumulated balance of other comprehensive income is reported in
the equity section of the financial statements and includes the unrealized gain
or loss on the California Water Service Group investment, and the net of tax
additional minimum pension liability adjustment related to the company sponsored
retirement plans.
Other Assets
Debt reacquisition costs are amortized over the term of the new debt.
Debt issuance costs are amortized over the life of each issue.
The excess cost over fair market value of net assets acquired is
recorded as goodwill and until December 2001, was amortized over the periods
estimated to be benefited, not exceeding 40 years. SJW Corp. adopted SFAS No.
142 "Goodwill and Other Intangible Assets". Accordingly, the company no longer
amortizes goodwill from business acquisitions.
Management periodically evaluates the recoverability of goodwill by
assessing whether the amortization of the balance over remaining life can be
recovered through expected and undiscounted future cash flows to determine if
impairment has occurred.
Income Taxes and Regulatory Assets
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the effect of temporary
differences between financial and tax reporting. Deferred tax assets and
liabilities are measured using enacted tax rates applicable to future years.
29
SJW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001, and 2000 -- (Continued)
(Dollars in thousands, except share data)
To the extent that the tax benefits of the temporary differences have
previously been passed through to customers through lower water rates,
management anticipates that the payment of the future tax liabilities resulting
from the reversal of the temporary differences will be recoverable through
rates. Therefore, a regulatory asset has been recorded for the portion of net
deferred tax liabilities, which are expected to be recovered through future
rates. The temporary differences are primarily related to the differences
between federal and state book and tax depreciation on property placed in
service before the adoption by the CPUC of full normalization for rate making
purposes. Although realization is not assured, management believes it is more
likely than not that all of the regulatory asset will be realized.
To the extent permitted by the CPUC, investment tax credits resulting
from utility plant additions are deferred and amortized over the estimated
useful lives of the related property.
Advances for Construction and Contributions in Aid of Construction
Advances for construction received after 1981 are being refunded
ratably over 40 years. Prior customer advances are refunded based on 22% of
related revenues. Estimated refunds for 2003 are $1,692.
Contributions in aid of construction represent funds received from
developers that are not refundable under CPUC regulations. Depreciation
applicable to utility plant constructed with these contributions is charged to
contributions in aid of construction.
Customer advances and contributions in aid of construction received
subsequent to 1986 and prior to June 12, 1996 generally must be included in
federal taxable income. Taxes paid relating to advances and contributions are
recorded as deferred tax assets for financial reporting purposes and are
amortized over 40 years for advances, and over the tax depreciable life of the
related asset for contributions. Receipts subsequent to June 12, 1996 are
generally exempt from federal taxable income.
Advances and contributions received subsequent to 1991 and prior to
1997 are included in state taxable income.
Revenue and Balancing Account
Revenue of San Jose Water Company includes amounts billed to customers
and unbilled amounts based on estimated usage from the latest meter reading to
the end of the year. 2002, 2001, and 2000 operating revenue include $3,257,
$2,912, and $2,706 respectively, from the operation of the City of Cupertino
municipal water system. 2000 revenue also included a provision of $1,072 for a
refund due to customers, out of which $531 and $541 were refunded in 2002 and
2001, respectively. The refund reflected a regulatory adjustment on previously
capitalized interest on utility plant under construction that was disallowed by
the CPUC.
The CPUC establishes the balancing account mechanism to track the
under-collection and over-collection of CPUC authorized revenue associated with
expense changes for purchased water, purchased power and pump tax. Since the
balances have to be approved by the CPUC before they can be incorporated into
rates, San Jose Water Company does not recognize the balancing account in its
revenue until the CPUC authorizes the change in customers' rates.
Earnings per Share
Basic earnings per share and comprehensive income per share are
calculated using income available to common shareholders and comprehensive
income, respectively, divided by the weighted average number of shares
outstanding during the year. SJW Corp. has no dilutive securities, and
accordingly, diluted earnings per share is not shown.
30
SJW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001, and 2000 -- (Continued)
(Dollars in thousands, except share data)
Business Segment Information
SJW Corp. and its subsidiaries operate predominantly in one reportable
business segment of providing water utility service to its customers. Nonutility
revenue, assets and net income do not have a material effect on SJW Corp.'s
financial condition and results of operations.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
Note 2. Capitalization
SJW Corp. is authorized to issue 6,000,000 shares of $3.125 par value
common stock.
At December 31, 2002 and 2001, 3,045,147 shares of common stock were
deemed issued and outstanding. At December 31, 2002 and 2001, 176,407 shares of
$25 par value preferred stock were authorized and unissued.
Note 3. Line Of Credit
SJW Corp. and its subsidiaries have available an unsecured bank line of
credit, allowing aggregate short-term borrowings of up to $30,000. This line of
credit bears interest at variable rates and expires on August 1, 2003. The
following table represents borrowings under these bank lines of credits:
2002 2001 2000
------------ ---------- ----------
Maximum short-term borrowing ............ $ 11,500 26,100 11,200
Average amount outstanding .............. 7,219 12,650 5,847
Weighted average interest rate .......... 3.1% 5.3% 7.6%
Interest rate at December 31 ............ 3.3% 3.8% 7.4%
Balance as of December 31 ............... $ 11,450 11,500 11,200
Note 4. Long-Term Debt
Long-term debt as of December 31 was as follows:
Description Due Date 2002 2001
- -------------------------------- ---------- ----------- ---------
Senior notes:
A 8.58% ...................... 2022 $ 20,000 20,000
B 7.37% ...................... 2024 30,000 30,000
C 9.45% ...................... 2020 10,000 10,000
D 7.15% ...................... 2026 15,000 15,000
E 6.81% ...................... 2028 15,000 15,000
F 7.20% ...................... 2031 20,000 20,000
--------- ------
Total long-term debt ...... $ 110,000 110,000
========= =======
Senior notes held by institutional investors are unsecured obligations
of San Jose Water Company and require interest-only payments until maturity. To
minimize issuance costs, all of the company's debt has historically been
privately placed. The fair value of long-term debt as of December 31, 2002 and
2001 was approximately $119,032 and $111,282, respectively, using a discounted
cash flow analysis, based on the current rates for similar financial instruments
of the same duration.
31
SJW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001, and 2000 -- (Continued)
(Dollars in thousands, except share data)
Note 5. Income Taxes
The following table reconciles income tax expense to the amount
computed by applying the federal statutory rate of 35% to income before income
taxes:
2002 2001 2000
--------- --------- ---------
"Expected" federal income tax ............................. $8,361 7,492 6,326
Increase (decrease) in taxes
attributable to:
State taxes, net of federal income tax benefit .......... 1,373 1,229 1,039
Dividend received deduction ............................. (302) (300) (296)
Merger related expense deduction ........................ -- (937) --
Other items, net ........................................ 226 (93) 340
------ ----- -----
$9,658 7,391 7,409
====== ===== =====
The components of income tax expense were:
2002 2001 2000
--------- ------- -----------
Current:
Federal ................................................. $4,740 3,946 7,070
State ................................................... 1,986 1,274 2,131
Deferred:
Federal ................................................. 2,838 1,795 (1,264)
State ................................................... 94 376 (528)
------ ----- ------
$9,658 7,391 7,409
====== ===== ======
The components of the net deferred tax liability as of December 31 were
as follows:
2002 2001
---------- ---------
Deferred tax assets:
Advances and contributions ................... $ 14,121 14,228
Unamortized investment tax credit ............ 1,095 1,128
Pensions and postretirement benefits ......... 2,061 1,265
California franchise tax ..................... 524 708
Other ........................................ 567 700
-------- ------
Total deferred tax assets ...................... $ 18,368 18,029
Deferred tax liabilities:
Utility plant ................................ $ 33,891 29,701
Investment ................................... 8,411 9,358
Debt reacquisition costs ..................... 1,041 1,091
Other ........................................ 2,695 2,490
-------- ------
Total deferred tax liabilities ................. 46,038 42,640
-------- ------
Net deferred tax liabilities ................... $ 27,670 24,611
======== ======
32
SJW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001, and 2000 -- (Continued)
(Dollars in thousands, except share data)
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not SJW Corp. will
realize the benefits of these deductible differences.
Note 6. Intangible Assets and Goodwill
Effective January 1, 2002, SJW Corp. adopted the provisions of SFAS No.
142 "Goodwill and Other Intangible Assets" regarding goodwill and intangible
assets amortization. Intangible assets consist of concession fees paid to the
City of Cupertino of $6,800 for operating the City of Cupertino municipal water
system, and other intangibles of $1,040 primarily incurred in conjunction with
the Santa Clara Valley Water District (SCVWD) water contracts related to the
operation of San Jose Water Company. All intangible assets are recorded at cost
and are amortized using the straight-line method over the legal or estimated
economic life of the asset, whichever is shorter, not to exceed 40 years.
Amortization expense for the intangible assets was $288, $289 and $289
for the years ended December 31, 2002, 2001 and 2000, respectively. Amortization
expense for 2003, 2004, 2005, 2006 and 2007 is anticipated to be $288 per year.
The costs of intangible assets as of December 31, 2002 and 2001 are as
follows:
Dollars in thousands 2002 2001
---------------------------------- --------- ---------
Concession fees ................ $6,800 $6,800
Other intangibles .............. 1,040 1,041
------ ------
Intangible Assets .............. $7,840 $7,841
Less: Accumulated amortization
Concession fees ............ 1,428 1,156
Other intangibles .......... 267 251
------ ------
Net Intangible Assets .......... $6,145 $6,434
====== ======
The excess cost over fair market value of net assets acquired is
recorded as goodwill and until December 2001, was amortized over the periods
estimated to be benefited, not exceeding 40 years. Effective January 1, 2002,
the company no longer amortizes goodwill from business acquisitions. On a
pro-forma basis, if the company had applied SFAS No. 142 during 2001 and 2000,
amortization of goodwill would have been as follows:
Dollars in thousands 2002 2001 2000
--------------------------------------------------- ------------ ------------ ------------
Reported net income ............................. $ 14,232 $ 14,017 $ 10,665
Add: Goodwill amortization, net of tax .......... -- 85 85
-------- -------- --------
Adjusted net income ............................. $ 14,232 $ 14,102 $ 10,750
======== ======== ========
Basic earnings per share, as reported ........... $ 4.67 $ 4.60 $ 3.50
Basic earnings per share, adjusted .............. $ 4.67 $ 4.63 $ 3.53
Note 7. Commitments
San Jose Water Company purchases water from Santa Clara Valley Water
District (SCVWD). Delivery schedules for purchased water are based on a contract
year beginning July 1, and are negotiated every three years under terms of a
master contract with SCVWD expiring in 2051. Based on current prices and
estimated deliveries, San Jose Water Company expects to purchase a minimum of
90% of the delivery schedule, or 19,300 million gallons ($24,900) of water, from
SCVWD in the contract year ending June 30, 2003.
33
SJW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001, and 2000 -- (Continued)
(Dollars in thousands, except share data)
In 1997, San Jose Water Company entered into a 25-year contract
agreement with the City of Cupertino to operate the City's municipal water
system. Under the terms of the contract agreement, San Jose Water Company
assumed responsibility for all maintenance, operating and capital costs, while
receiving all payments for water service. Water service rates are subject to
approval by the Cupertino City Council.
Note 8. Contingency
In January 2002, SJW Land Company entered into an Agreement for
Possession and Use (Agreement) with the Valley Transportation Agency (VTA)
whereby SJW Land Company has granted VTA an irrevocable right to possession and
use of 1.23 acres of the company's parking lot property for the development of a
light rail station. VTA has adopted a resolution authorizing a condemnation
proceeding to acquire the land and has deposited $3.7 million in an escrow
account as fair market compensation. SJW Land Company waived the right to
challenge VTA's possession and use in any subsequent eminent domain proceeding
but reserved the right to assert, and has disputed, the fair market value placed
on the land. According to the terms of the Agreement, if a settlement is not
reached within three months of the execution of the Agreement, VTA can file an
eminent domain complaint to acquire title to the parking lot property. As of
December 31, 2002, VTA has not filed a complaint and SJW Land Company continues
to negotiate in good faith with VTA over the fair market value. This transaction
is expected to result in an increase in net income, if and when the compensation
issue is settled or a final court order is rendered.
Note 9. Joint Venture
In September 1999, SJW Land Company formed 444 West Santa Clara Street,
L.P., a limited partnership, with a real estate development firm whereby SJW
Land Company contributed real property in exchange for a 70% limited partnership
interest. The real estate development firm is partially owned by an individual
who also serves as a director of SJW Corp. A commercial building was constructed
on the partnership property and is leased to an international real estate firm
under a twelve-year long-term lease. The partnership is being accounted for
under the equity method of accounting. Included in the Consolidated Statements
of Income and Comprehensive Income is SJW Land Company's share of the
partnership earnings of $147 in 2002, $165 in 2001 and $96 in 2000.
Note 10. Crystal Choice Water Service LLC
In January 2001, SJW Corp. formed Crystal Choice Water Service LLC, a
limited liability company, with Kinetico, Incorporated, a leading water
conditioning equipment manufacturer. Crystal Choice Water Service LLC engages in
the sale and rental of water conditioning equipment. SJW Corp. owns
approximately 75% of the joint venture and has invested $287 and $850 in 2002
and 2001, respectively. The consolidated financial statements of SJW Corp. at
December 31, 2002 and 2001 include the operating results of Crystal Choice Water
Service LLC. Inter-company balances were eliminated. Minority interest of $87
and $121 was included in other income in the Consolidated Statements of Income
and Comprehensive Income at December 31, 2002 and 2001, respectively. Included
in other noncurrent liabilities of SJW Corp.'s Balance Sheet is minority
interest of $187 and $162 at December 31, 2002 and 2001, respectively.
34
SJW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001, and 2000 -- (Continued)
(Dollars in thousands, except share data)
Note 11. Employee Benefit Plans
Pension Plans
San Jose Water Company sponsors noncontributory defined benefit pension
plans. Benefits under the plans are based on an employee's years of service and
highest consecutive three years of compensation. Company policy is to contribute
the net periodic pension cost to the extent it is tax deductible.
San Jose Water Company has a Supplemental Executive Retirement Plan,
which is a defined benefit plan under which the company will pay supplemental
pension benefits to key executives in addition to the amounts received under the
retirement plan. The annual cost of this plan has been included in the
determination of the net periodic benefit cost shown below. The plan, which is
unfunded, had a projected benefit obligation of $4,583, $5,399, and $9,651 as of
December 31, 2002, 2001, and 2000, respectively, and net periodic pension cost
of $606, $616, and $1,818, for 2002, 2001, and 2000, respectively.
Deferral Plan
San Jose Water Company sponsors a salary deferral plan that allows
employees to defer and contribute a portion of their earnings to the plan.
Contributions, not to exceed set limits, are matched by the company. Company
contributions were $671, $639, and $607, in 2002, 2001, and 2000, respectively.
Other Postretirement Benefits
In addition to providing pension and savings benefits, San Jose Water
Company provides health care and life insurance benefits for retired employees.
The plan is a flat dollar plan which is unaffected by variations in health care
costs.
Net periodic cost for the defined benefit plans and other
postretirement benefits was:
Pension Benefits Other Benefits
----------------------------------- -----------------------------
2002 2001 2000 2002 2001 2000
------- ------ ------ ----- ---- ----
Weighted-Average
Assumptions as of Dec. 31 ......................... % % % % % %
Discount rate ..................................... 6.75 7.25 7.75 6.75 7.25 7.75
Expected return on plan assets .................... 8.00 8.00 8.00 8.00 8.00 8.00
Rate of compensation increase ..................... 4.00 4.00 4.00 n.a. n.a. n.a.
------- ------ ------ ----- ---- ----
Components of Net Periodic Benefit Cost
Service cost ...................................... $ 1,148 926 950 $ 41 40 38
Interest cost ..................................... 2,640 2,421 2,591 118 118 114
Expected return on assets ......................... (2,659) (2,940) (2,834) (40) (33) (31)
Amortization of transition obligation ............. 54 3 3 56 56 56
Amortization of prior service cost ................ 354 258 258 16 16 16
Recognized actuarial (gain) loss .................. 57 (346) 244 -- (6) (13)
------- ------ ------ ----- ---- ----
Net periodic benefit cost ......................... $ 1,594 322 1,212 $ 191 191 180
======= ====== ====== ===== ==== ====
35
SJW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001, and 2000 -- (Continued)
(Dollars in thousands, except share data)
The actuarial present value of benefit obligations and the funded
status of San Jose Water Company's defined benefit pension and other
postretirement plans as of December 31 were as follows:
Pension Benefits Other Benefits
---------------------------------- -------------------------------
2002 2001 2000 2002 2001 2000
-------- ------- ------- ------- ------ ------
Change in Benefit Obligation
Benefit obligation at beginning of year .............. $ 37,021 36,385 26,749 $ 1,709 1,569 1,258
Service cost ......................................... 1,148 926 950 41 40 38
Interest cost ........................................ 2,640 2,421 2,591 118 118 114
Amendments ........................................... 424 1,275 -- -- -- --
Actuarial (gain) loss ................................ 1,931 (2,019) 7,943 66 101 258
Benefits paid ........................................ (1,698) (1,967) (1,848) (113) (119) (99)
-------- ------- ------- ------- ------ ------
Benefit obligation at end of year .................... $ 41,466 37,021 36,385 $ 1,821 1,709 1,569
======== ======= ======= ======= ====== ======
Change in Plan assets
Fair value of assets at beginning of year ............ $ 34,010 37,422 36,088 $ 394 483 439
Actual return on plan assets ......................... (4,713) (1,766) 3,016 7 18 22
Employer contributions ............................... 233 321 166 206 -- 101
Benefits paid ........................................ (1,698) (1,967) (1,848) (100) (107) (79)
-------- ------- ------- ------- ------ ------
Fair value of assets at end of year .................. $ 27,832 34,010 37,422 $ 507 394 483
======== ======= ======= ======= ====== ======
Funded Status
Plan assets less benefit obligation .................. $(13,633) (3,010) 1,038 $(1,313) (1,315) (1,086)
Unrecognized transition obligation ................... 152 206 209 509 565 622
Unamortized prior service cost ....................... 2,270 3,387 2,370 39 54 70
Unrecognized actuarial (gain) loss ................... 9,388 (1,045) (4,078) 20 (94) (235)
-------- ------- ------- ------- ------ ------
Accrued benefit cost ................................. $ (1,823) (462) (461) $ (745) (790) (629)
======== ======= ======= ======= ====== ======
Amounts recognized on the balance sheet consist of:
Pension Benefits Other Benefits
---------------------------------- ------------------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Accrued benefit costs ................................... $ (1,823) (462) (461) $ (745) (790) (629)
Additional minimum liability ............................ (4,541) (2,580) (1,943) -- -- --
Intangible asset ........................................ 2,423 1,001 943 -- -- --
Accumulated other comprehensive loss .................... 2,118 1,579 1,000 -- -- --
-------- ------ ------ ------ ---- ----
Net amount Recognized ................................... $ (1,823) (462) (461) $ (745) (790) (629)
======== ====== ====== ====== ==== ====
Note 12. Long-Term Incentive Plan
During 2002, SJW Corp. adopted the Long-Term Incentive Plan (Incentive
Plan) under which 300,000 shares of common stock will initially be reserved for
issuance. The Incentive Plan will allow SJW Corp. to provide key employees,
including officers, the opportunity to acquire a meaningful equity interest in
the corporation as an incentive for them to remain employed by SJW Corp. and its
subsidiaries. In no event may any one participant in the Incentive Plan receive
awards under the Incentive Plan in any calendar year covering an aggregate of
more than 100,000 shares of the common stock. Additionally, awards granted under
the Incentive Plan may be conditioned upon the attainment of specified
performance goals. The types of awards included in the Incentive Plan are stock
options, dividend units, performance shares, rights to acquire restricted stock
and stock bonuses. As of December 31, 2002, no award had been granted under the
Incentive Plan.
36
SJW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001, and 2000 -- (Continued)
(Dollars in thousands, except share data)
Note 13. Sale of Nonutility Property
On October 8, 2002, SJW Land Company, a wholly owned subsidiary of SJW
Corp., entered into an agreement with the Santa Clara Valley Water District
whereby SJW Land Company will sell the San Tomas station, a nonutility property,
at a contract price of $5,400. The transaction is expected to be completed in
March 2003. The sale is expected to result in a gain of approximately $3,163,
net of income tax expense of $2,198, which is to be included in 2003. The
company will reinvest the proceeds in other commercial properties.
Note 14. Unaudited Quarterly Financial Data
Summarized quarterly financial data is as follows:
2002 Quarter ended
---------------------------------------------------
March June September December
------------ ---------- ----------- ---------
Operating revenue ...................... $ 27,718 38,696 46,153 33,085
Operating income ....................... 3,372 5,720 7,397 4,069
Net income ............................. 1,749 3,991 5,776 2,716
Comprehensive income ................... 1,652 3,731 5,990 1,177
Basic earnings per share ............... 0.57 1.31 1.90 0.89
Comprehensive income per share ......... 0.54 1.22 1.97 0.39
Market price range of stock:
High ................................ 89.00 88.20 81.40 83.85
Low ................................. 78.25 77.05 77.00 77.80
Dividends per share .................... 0.69 0.69 0.69 0.69
2001 Quarter ended
---------------------------------------------------
March June September December
------------ ---------- ----------- ---------
Operating revenue ...................... $ 24,245 36,364 44,182 31,292
Operating income ....................... 2,212 5,715 7,947 3,953
Net income ............................. 678 4,170 6,395 2,774
Comprehensive income ................... 1,716 2,255 7,272 1,620
Basic earnings per share ............... 0.22 1.37 2.10 0.91
Comprehensive income per share ......... 0.56 0.74 2.39 0.53
Market price range of stock:
High ................................ 106.50 87.00 86.50 91.20
Low ................................. 71.90 79.00 76.50 79.08
Dividends per share .................... 0.615 0.6525 0.6525 0.6525
37
SJW CORP.
FINANCIAL STATEMENT SCHEDULE
Schedule II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 31, 2002, 2001 and 2000
Description 2002 2001 2000
- ----------- --------- -------- --------
Allowance for doubtful accounts
Balance, beginning of period ................................... $ 100,000 100,000 100,000
Charged to expense ............................................. 397,860 214,243 180,480
Accounts written off ........................................... (405,030) (240,096) (215,570)
Recoveries of accounts written off ............................. 27,170 25,853 35,090
--------- -------- --------
Balance, end of period ......................................... $ 120,000 100,000 100,000
========= ======== ========
Reserve for self insurance
Balance, beginning of period ................................... $ 579,698 661,247 707,025
Charged to expense ............................................. 90,000 40,000 80,000
Payments ....................................................... (60,406) (121,549) (125,778)
--------- -------- --------
Balance, end of period ......................................... $ 609,292 579,698 661,247
========= ======== ========
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is contained in part under the
caption "Executive Officers of Registrant" in Part I of this report, and the
remainder is contained in SJW Corp.'s Proxy Statement for its 2003 Annual
Meeting of Shareholders to be held on April 29, 2003 (the "2003 Proxy
Statement") under the captions "Proposal 1 -- Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance," and is incorporated
herein by reference.
Item 11. Executive Compensation
The information required by this item is contained in the 2003 Proxy
Statement under the captions "Compensation of Directors," "Executive
Compensation," "Termination of Employment and Change-in-Control Arrangements,"
and "Compensation Committee Interlocks and Insider Participation" and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this item is contained in the 2003 Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
Management" and "Securities Authorized for Issuance under Equity Compensation
Plans," and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is contained in the 2003 Proxy
Statement under the caption "Certain Relationships and Related Transactions,"
and is incorporated herein by reference.
38
PART IV
Item 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation within 90 days of the filing date of this report, SJW Corp.'s Chief
Executive Officer and Chief Financial Officer have concluded that SJW Corp.'s
disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c)under the Securities Exchange Act of 1934 ("Exchange Act")) are
effective to ensure that information required to be disclosed by SJW Corp. in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
(b) Changes in internal controls. There have been no significant
changes in internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation of SJW Corp.'s Chief
Executive Officer and Chief Financial Officer.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(1) Financial Statements
Page
-----
Independent Auditors' Report .................................................... 23
Consolidated Balance Sheets as of December 31, 2002 and 2001 .................... 24
Consolidated Statements of Income and Comprehensive Income for the years ended
December 31, 2002, 2001 and 2000 ............................................... 25
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000 ............................................... 26
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001
and 2000 ....................................................................... 27
Notes to Consolidated Financial Statements ...................................... 28
(2) Financial Statement Schedule
Schedule
Number II
- ---------
Valuation and Qualifying Accounts and Reserves,
Years ended December 31, 2002, 2001, and 2000 ......... 38
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial statements or
related notes.
(3) Exhibits required to be filed by Item 601 of Regulation S-K
See Exhibit Index located immediately following paragraph (b) of this
Item 15.
The exhibits filed herewith are attached hereto (except as noted) and
those indicated on the Exhibit Index which are not filed herewith were
previously filed with the Securities and Exchange Commission as indicated.
(b) Report on Form 8-K. There have been no reports filed on
Form 8-K during the last quarter of the period covered by this report.
39
EXHIBIT INDEX
Exhibit
No. Description
- -------- -----------------------------------------------------------------------------------
2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:
2.1 Registration Rights Agreement entered into as of December 31, 1992 among SJW
Corp., Roscoe Moss, Jr. and George E. Moss. Filed as Exhibit 4.1 to Form 8-K
January 11, 1993. S.E.C. File No. 1-8966.
3 Articles of Incorporation and By-Laws:
3.1 Restated Articles of Incorporation and By-Laws of SJW Corp., defining the rights
of holders of the equity securities of SJW Corp. Filed as Exhibit 3.1 to Form 10-K
for the year ended December 31, 2001.
4 Instruments Defining the Rights of Security Holders, including Indentures: No
current issue of the registrant's long-term debt exceeds 10 percent of its total
assets. SJW Corp. hereby agrees to furnish upon request to the Commission a copy
of each instrument defining the rights of holders of unregistered senior and
subordinated debt of the company.
10 Material Contracts:
10.1 Water Supply Contract dated January 27, 1981 between San Jose Water Works and
the Santa Clara Valley Water District, as amended. Filed as Exhibit 10.1 to Form
10-K for the year ended December 31, 2001.
Executive Compensation Plans and Arrangements:
10.2 Ninth amendment to San Jose Water Company Retirement Plan as amended. Filed
as an Exhibit to Annual Report on Form 10-K for the year ended December 31,
1996. S.E.C. File No. 1-8966.
10.3 San Jose Water Company Executive Supplemental Retirement Plan adopted by San
Jose Water Company Board of Directors. (1)(2)
10.4 First Amendment to San Jose Water Company Executive Supplemental Retirement
Plan adopted by San Jose Water Company Board of Directors. (1)(2)
10.5 Second Amendment to San Jose Water Company Executive Supplemental
Retirement Plan adopted by San Jose Water Company Board of Directors. Filed as
an Exhibit to Annual Report on Form 10-K for the year ended December 31, 1998.
S.E.C. File No. 1-8966. (2)
10.6 Third Amendment to San Jose Water Company Executive Supplemental
Retirement Plan adopted by San Jose Water Company Board of Directors. Filed as
an Exhibit to Annual Report on Form 10-K for the year ended December 31, 1998.
S.E.C. File No. 1-8966. (2)
10.7 Fourth Amendment to San Jose Water Company Executive Supplemental
Retirement Plan adopted by San Jose Water Company Board of Directors. Filed as
an Exhibit to Annual Report on Form 10-K for the year ended December 31, 1998.
S.E.C. File No. 1-8966. (2)
40
Exhibit
No. Description
- -------- ---------------------------------------------------------------------------------
10.8 Fifth Amendment to San Jose Water Company Executive Supplemental Retirement
Plan adopted by San Jose Water Company Board of Directors. Filed as an Exhibit
to Annual Report on Form 10-K for the year ended December 31, 1998. S.E.C.
File No. 1-8966. (2)
10.9 SJW Corp. Executive Severance Plan adopted by SJW Corp. Board of Directors.
Filed as an Exhibit to Annual Report on Form 10-K for the year ended December
31, 1998. S.E.C. File No. 1-8966. (2)
10.10 Sixth Amendment to San Jose Water Company's Executive Supplemental
Retirement Plan. Filed as an Exhibit to 10-Q for the period ending September 30,
1999. S.E.C. File No. 1-8966. (2)
10.11 Amendment to SJW Corp.'s Executive Severance Plan. Filed as an Exhibit to 10-Q
for the period ending September 30, 1999. S.E.C. File No. 1-8966. (2)
10.12 Resolution for Directors' Retirement Plan adopted by SJW Corp. Board of
Directors as amended on September 22, 1999. Filed as an Exhibit to 10-Q for the
period ending September 30, 1999. S.E.C. File No. 1-8966. (2)
10.13 Resolution for Directors' Retirement Plan adopted by San Jose Water Company's
Board of Directors as amended on September 22, 1999. Filed as an Exhibit to 10-Q
for the period ending September 30, 1999. S.E.C. File No. 1-8966. (2)
10.14 Resolution for Directors' Retirement Plan adopted by SJW Land Company Board
of Directors on September 22, 1999. Filed as an Exhibit to 10-Q for the period
ending September 30, 1999. S.E.C. File No. 1-8966. (2)
10.15 SJW Corp. Long-Term Incentive Plan, adopted by SJW Corp. Board of Directors
March 6, 2002. Filed as an Exhibit to Form 10-Q for the period ended June 30,
2002. (2)
10.16 Seventh Amendment to San Jose Water Company's Executive Supplemental
Retirement Plan, adopted by San Jose Water Company Board of Directors. Filed
as an Exhibit to Form 10-Q for the period ended June 30, 2002. (2)
10.17 Limited Partnership Agreement of 444 West Santa Clara Street, L. P. executed
between SJW Land Company and Toeniskoetter & Breeding, Inc. Development.
Filed as an Exhibit to 10-Q for the period ending September 30, 1999. S.E.C. File
No. 1-8966.
21 Subsidiaries of the Registrant. (1)
99 Additional Exhibits.
99.1 Certification by President and Chief Executive Officer. (1)
99.2 Certification by Chief Financial Officer and Treasurer. (1)
- ------------
(1) Filed concurrently herewith.
(2) Management contract or compensatory plan or arrangement.
In accordance with the Securities and Exchange Commission's
requirements, SJW Corp. will furnish copies of any exhibit upon payment of 30
cents per page fee.
To order any exhibit(s), please advise the Secretary, SJW Corp., 374
West Santa Clara Street, San Jose, CA 95196, as to the exhibit(s) desired.
On receipt of your request, the Secretary will provide to you the cost
of the specific exhibit(s). The Secretary will forward the requested exhibits
upon receipt of the required fee.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: January 29, 2003 By /s/ DREW GIBSON
----------------------------------
Drew Gibson,
Chairman, Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: January 29, 2003 By /s/ W. RICHARD ROTH
----------------------------------
W. Richard Roth,
President, Chief Executive Officer and
Member, Board of Directors
Date: January 29, 2003 By /s/ ANGELA YIP
----------------------------------
Angela Yip,
Chief Financial Officer
Date: January 29, 2003 By /s/ VICTOR K. WONG
----------------------------------
Victor K. Wong,
Controller (Chief Accounting Officer)
Date: January 29, 2003 By /s/ MARK L. CALI
----------------------------------
Mark L. Cali,
Member, Board of Directors
Date: January 29, 2003 By /s/ J. PHILIP DINAPOLI
----------------------------------
J. Philip DiNapoli,
Member, Board of Directors
Date: January 29, 2003 By /s/ DREW GIBSON
----------------------------------
Drew Gibson,
Member, Board of Directors
Date: January 29, 2003 By /s/ RONALD R. JAMES
----------------------------------
Ronald R. James,
Member, Board of Directors
Date: January 29, 2003 By /s/ GEORGE E. MOSS
----------------------------------
George E. Moss,
Member, Board of Directors
42
Date: January 29, 2003 By /s/ ROSCOE MOSS, JR.
----------------------------------
Roscoe Moss, Jr.,
Member, Board of Directors
Date: January 29, 2003 By /s/ CHARLES J.TOENISKOETTER
----------------------------------
Charles J. Toeniskoetter,
Member, Board of Directors
Date: January 29, 2003 By /s/ FREDERICK ULRICH
----------------------------------
Frederick Ulrich,
Member, Board of Directors
43
CERTIFICATIONS
I, W. Richard Roth, President and Chief Executive Officer, certify
that:
1. I have reviewed this annual report on Form 10-K of SJW Corp. (the
"registrant");
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 7, 2003
/s/ W. RICHARD ROTH
-------------------------------------
W. Richard Roth
President and Chief Executive Officer
44
I, Angela Yip, Chief Financial Officer and Treasurer, certify that:
1. I have reviewed this annual report on Form 10-K of SJW Corp. (the
"registrant");
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 7, 2003
/s/ ANGELA YIP
-------------------------------------
Angela Yip
Chief Financial Officer and Treasurer
45