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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, 2003
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 $1.042 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 30, 2003 was $183,036,524.
Shares of common stock outstanding on March 7, 2004 - 9,135,441.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement relating to the Registrant's
2004 Annual Meeting of Shareholders, to be held on April 29, 2004, 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
-----
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 ..... 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................ 26
Item 8. Financial Statements and Supplementary Data ............................................... 27
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ...... 47
Item 9A. Controls and Procedures ................................................................... 47
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................ 47
Item 11. Executive Compensation .................................................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ................................................................................... 48
Item 13. Certain Relationships and Related Transactions ............................................ 48
PART IV
Item 14. Principal Accountant Fees and Services .................................................... 48
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 48
Exhibit Index ...................................................................................... 50
Signatures ......................................................................................... 53
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 such as "expect", "estimate", "anticipate",
"intends", "seeks", "plans", "projects", variation of such words, 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 or revise the information
contained in this report, including the forward-looking statements for any
reason.
Item 1. Business
(a) General Development of Business
SJW Corp. (the Corporation) was incorporated in California on February 8,
1985. SJW Corp. is a holding company with three subsidiaries.
San Jose Water Company, a wholly owned subsidiary, with headquarters at
374 West Santa Clara Street in San Jose, California 95196, was originally
incorporated under the laws of the State of California in 1866. The company was
later reorganized and reincorporated as the San Jose Water Works. San Jose Water
Works was reincorporated in 1985 as San Jose Water Company, with SJW Corp. as
the parent holding company. San Jose Water Company is a public utility in the
business of providing water service to a population of approximately one million
people in an area comprising about 138 square miles in the metropolitan San Jose
area. San Jose Water Company's web site can be accessed via the Internet at
http://www.sjwater.com.
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, other undeveloped
land primarily in the San Jose Metropolitan area, some properties in the states
of Florida and Connecticut, and a 70% limited partnership interest in 444 West
Santa Clara Street, L.P.
Crystal Choice Water Service LLC, a 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,
which represents approximately 7% of its outstanding shares as of December 31,
2003.
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.
2
The purpose of an offset rate increase is to compensate utilities for
increases in specific expenses, such as those for purchased water, pump tax or
purchased power.
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, 2003, the balancing
account had a net over-collected balance of $7,000, which included an
under-collection of $382,000 accrued prior to November 29, 2001 and an
over-collection of $389,000 accrued for the period from November 30, 2001
through December 31, 2003. The net under-collected balance of $262,000 as of
December 31, 2002 included the aforementioned under-collection of $382,000 and
an over-collection of $120,000 accrued for the period from November 30, 2001
through December 31, 2002.
On September 30, 2002, the interim rate relief bill (AB2838) was signed
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. Since a CPUC decision on the requested
rates on the General Rate Case application filed with the CPUC on May 23, 2003
has not been issued as of December 31, 2003, the CPUC has allowed San Jose Water
Company an interim rate increase of approximately 2% effective January 1, 2004.
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 nonregulated
businesses, SJW Land Company (SJW Land), which operates parking facilities and
commercial building rentals, and Crystal Choice Water Service LLC (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, 2003
(in thousands)
--------------------------------------------------------------
SJW SJW
SJWC Land CCWS Corp. Corp.
----------- -------- ------------ --------- ----------
Operating revenue ......... $146,132 2,374 1,226 - 149,732
Net income (loss) ......... 16,979 1,096 (182)* 784 18,677
Total assets .............. 450,796 28,108 840 31,973 511,717
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 .............. 411,787 12,640 780 28,016 453,223
3
Year Ended December 31, 2001
(in thousands)
--------------------------------------------------------------
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 .............. 388,147 11,911 707 30,252 431,017
- ------------
* Before minority interest.
(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
approximately 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 that is
being amortized over the contract term. San Jose Water 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 consists of groundwater from wells,
surface water from watershed run-off and diversion, and imported water purchased
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 supply, which
during a year of normal rainfall satisfy about 6% to 8% of San Jose Water
Company's current annual needs, provides 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.
4
Except in a few isolated cases before 1989 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 on all customers at the request
of SCVWD.
Groundwater in 2003 remained comparable to the 30-year normal level. On
January 29, 2004, the SCVWD's ten reservoirs were 46.7% full with 79,163
acre-feet of water in storage. The rainfall from July 2003 to January 2004 was
about the same in comparison to the 30-year average. The delivery of California
and Federal contract water to the SCVWD is expected to be met 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 19.71
inches for the season from July 1 through December 31, 2003, which is slightly
above the five-year average.
While the water supply outlook for 2004 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 franchise rights, water rights, and necessary
rights-of-way 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
5
land. According to the terms of the Agreement, if a settlement is not reached
within three months of the execution of the Agreement, VTA can file an eminent
domain complaint to acquire title to the parking lot property. On April 11,
2003, VTA filed the eminent domain lawsuit. As a part of the proceedings, VTA
has transferred funds from the escrow account into a court deposit account to
secure its ongoing right of possession for construction of the light rail
station pending final litigation. Compensation for the taking of property will
be determined by the court or by way of settlement between SJW Land Company and
VTA. This transaction will be recorded and it is expected to result in an
increase to net income when the compensation issue is settled or a final court
order is rendered.
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
currently 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 currently 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, 2003, San Jose Water Company had 301 employees, of whom
80 were executive, administrative or supervisory personnel, and of whom 221 were
members of unions. San Jose Water Company reached a two-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
period from January 1, 2004 through December 31, 2005. Both groups are
affiliated with the AFL-CIO. The agreement includes approximately 3% and 3.5%
wage adjustments for union workers for calendar years 2004 and 2005,
respectively, with minor benefit modifications.
6
Executive Officers of the Registrant
Name Age Offices and Experience
- ------------------------- ----- -------------------------------------------------------------
W.R. Roth ............... 51 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. Mr. Roth has served as
a director of SJW Corp., San Jose Water Company and SJW
Land Company since 1994.
R.J. Balocco ............ 54 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 .......... 58 San Jose Water Company - Senior Vice President,
Operations. Prior to becoming Sr. Vice President of
Operations, he was Vice President of Operations since 1996.
Mr. Belhumeur has been with San Jose Water Company since
1970.
D. Drysdale ............. 48 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 joined San Jose Water Company in 1992.
J. Johansson ............ 58 San Jose Water Company - Vice President, Human
Resources. Prior to becoming Vice President, Human
Resources in 1999, he was Director of Human Resources in
1998. Prior to 1998 he was Personnel Manager. Mr.
Johansson has been with San Jose Water Company since
1976.
R.J. Pardini ............ 58 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 .................. 50 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 ................ 53 San Jose Water Company - Senior Vice President,
Administration from April 2003. Prior to April 2003, he was
Vice President, Water Quality. Mr. Yoo has been with San
Jose Water Company since 1985.
R.A. Loehr .............. 57 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 ............... 34 San Jose Water Company - Controller. He has been with
San Jose Water Company since December 16, 2002. He
served as 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.'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 at http://www.sjwater.com,
as soon as reasonably practicable after the Corporation 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 255 million gallons per day and the present capacity for taking
purchased water is approximately 172 million gallons per day. The gravity water
collection system has a physical delivery capacity of approximately 29 million
gallons per day. During 2003, a maximum and average of 211 million gallons and
132 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
defects in title which do not materially affect their use.
SJW Land Company owns approximately eight acres of property adjacent to
San Jose Water Company's general office facilities, approximately 28 acres of
property in the states of Florida and Connecticut, and approximately five
undeveloped acres of land and commercial properties primarily 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 31% 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 20%
of SJW Land Company's revenue is generated from this commercial building. SJW
Land Company has sold San Tomas station, a nonutility property in March 2003 and
subsequently in April 2003, reinvested the property sale proceeds by acquiring
two income producing properties in the States of Connecticut and Florida.
Approximately 32% of SJW Land's revenue is generated from these two income
producing properties. SJW Land Company also owns a 70% limited partnership
interest in 444 West Santa Clara Street, L.P., a real estate limited partnership
that owns and operates an office building.
Item 3. Legal Proceedings
SJW Corp. is subject to ordinary routine litigation incidental to its
business. Other than as disclosed regarding the eminent domain proceeding in
"Competition and Condemnation" under Item 1, "Business", there are no other
pending legal proceedings to which the Corporation or any of its subsidiaries is
a party or to which any of its properties is the subject that are expected to
have a material effect on the Corporation's financial position, results of
operations or cashflows.
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".
Stock Split
On March 1, 2004, SJW Corp. effected a three-for-one split on the
Corporation's common stock for holders of record on February 10, 2004. The share
and per share data presented herein has been adjusted to reflect the
aforementioned stock split.
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 2003 and 2002 fiscal years
is contained in the section captioned "Market Price Range of Stock" in the
tables set forth in Note 15 of "Notes to Consolidated Financial Statements" in
Part II, Item 8.
(b) Holders
There were 700 record holders of SJW Corp.'s common stock on December 31,
2003.
(c) Dividends
Quarterly dividends have been paid on SJW Corp.'s and its predecessor's
common stock for 241 consecutive quarters and the quarterly rate has been
increased during each of the last 36 years. The information required by this
item as to the cash dividends paid on common stock in 2003 and 2002 is contained
in the section captioned "Dividends per share" in the tables set forth in Note
15 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
2003 2002 2001 2000 1999
-------------- ------------ ------------ ------------ -----------
Consolidated Results of Operations (in thousands)
Operating revenue ...................................... $ 149,732 145,652 136,083 123,157 117,001
Operating expense:
Operation ............................................. 88,241 89,137 84,156 76,622 69,264
Maintenance ........................................... 7,724 7,866 7,090 6,881 6,638
Taxes ................................................. 15,588 14,078 11,770 11,496 12,713
Depreciation and amortization ......................... 15,225 14,013 13,240 11,847 10,235
---------- ------- ------- ------- -------
Total operating expense ............................. 126,778 125,094 116,256 106,846 98,850
---------- ------- ------- ------- -------
Operating income ....................................... 22,954 20,558 19,827 16,311 18,151
Interest expense, other income and deductions .......... 4,277 6,326 5,810 5,646 2,267
---------- ------- ------- ------- -------
Net income ............................................. 18,677 14,232 14,017 10,665 15,884
Dividends paid ......................................... 8,861 8,405 7,834 7,491 7,379
---------- ------- ------- ------- -------
Invested in the business ............................... $ 9,816 5,827 6,183 3,174 8,505
========== ======= ======= ======= =======
Consolidated Per Share Data
Net income ............................................. $ 2.04 1.56 1.53 1.17 1.73
Dividends paid ......................................... $ 0.97 0.92 0.86 0.82 0.80
Shareholders' equity at year-end ....................... $ 18.21 16.80 16.35 15.80 15.75
Consolidated Balance Sheet (in thousands)
Utility plant and intangible assets .................... $ 583,709 541,919 507,227 462,892 432,262
Less accumulated depreciation and amortization ......... 174,985 161,576 149,721 139,396 129,828
---------- ------- ------- ------- -------
Net utility plant ................................... 408,724 380,343 357,506 323,496 302,434
---------- ------- ------- ------- -------
Nonutility property .................................... 27,629 10,487 10,309 9,979 10,133
Total assets ........................................... 511,717 453,223 431,017 391,930 372,427
Capitalization:
Shareholders' equity .................................. 166,368 153,499 149,354 144,325 143,894
Long-term debt ........................................ 139,614 110,000 110,000 90,000 90,000
---------- ------- ------- ------- -------
Total capitalization ................................ $ 305,982 263,499 259,354 234,325 233,894
========== ======= ======= ======= =======
Other Statistics - San Jose Water Company
Customers at year-end .................................. 220,100 219,400 219,000 218,500 217,200
Average revenue per customer ........................... $ 664.99 652.79 612.78 556.99 534.98
Investment in utility plant per customer ............... $ 2,652 2,470 2,316 2,118 1,990
Miles of main at year-end .............................. 2,430 2,422 2,419 2,419 2,409
Water production (million gallons) ..................... 49,593 52,068 52,122 52,021 51,166
Maximum daily production (million gallons) ............. 211 216 199 217 207
Population served (estimate) ........................... 992,000 989,000 988,000 985,000 979,000
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.
San Jose Water Company is a publicly traded investor-owned water
utilities. The United States water utility industry is largely fragmented and is
dominated by the municipal-owned water systems. Unlike
10
many other industries, the water utility is regulated, and provides a
life-sustaining product. This makes the water utilities subject to lower
business cycle risks than non-regulated industries. Throughout the years, the
company continued to invest in utility plant, which reflected a diligent and
disciplined approach to stewardship of the water system. Additionally, the
company has continued to expand its existing portfolio of non-regulated water
service contracts.
SJW Land Company, a wholly owned subsidiary, owns and operates a 750-space
surface parking facility, which is located adjacent to the San Jose Water
Company's headquarters and the HP Pavilion in San Jose, California. SJW Land
Company also owns commercial buildings, other undeveloped land primarily in the
San Jose Metropolitan area, some other properties in the states of Florida and
Connecticut, and a 70% limited partnership interest in 444 West Santa Clara
Street, L.P.
SJW Land Company continued to develop its asset base into a relatively low
risk, moderately leveraged, diversified portfolio of income-producing properties
through tax-advantaged exchanges. This provides consistent and sustainable
earnings to the company.
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 or approximately 7% of California
Water Service Group as of December 31, 2003.
On Janurary 29, 2004, the Board of Directors of SJW Corp. approved a
three-for-one split of its common stock. The trading price has subsequently been
adjusted for three for one on March 2, 2004. All share and per share data has
been adjusted to reflect the three-for-one stock split.
Critical Accounting Policies:
SJW Corp. has identified accounting policies delineated below as the
policies critical to its business operations and the understanding of the
results of operations. The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements, and revenues and
expenses during the reporting period. SJW Corp. bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. The impact and any associated risks related
to these policies on the Corporation's business operations is discussed
throughout "Management's Discussion and Analysis of Financial Condition and
Results of Operations" where such policies affect the Corporation's reported and
expected financial results. For a detailed discussion on the application of
these and other accounting policies, see Note 1 of "Notes to Consolidated
Financial Statements". The Corporation's critical accounting policies are as
follows:
Balancing Account
The California Public Utilities Commission (CPUC) establishes a balancing
account mechanism within its regulatory regime. A separate balancing account
must be maintained for each offset expense item (e.g., purchased water,
purchased power and pump tax). The purpose of a balancing account is to track
the under-collection or over-collection associated with expense changes and the
revenue authorized by the CPUC to offset those expense changes. Since balances
are being tracked and have to be approved by the CPUC before they can be
incorporated into rates, San Jose Water Company has not recognized the balancing
account in its financial statements. The balancing account balance varies with
the seasonality of the water utility business such that during the summer months
when the demand for water is at its peak, the balancing account tends to reflect
an under-collection, while during the winter months when demand for water is
relatively lower, the balancing account tends to reflect an over-collection. Had
the balancing account been recognized in San Jose Water Company's financial
statements, San Jose Water Company's retained earnings would be increased by the
amount of balancing account over-collection, as the case may be, or decreased by
the amount of balancing account under-collection, less applicable taxes. At
December 31, 2003, the balancing account had a net over-collected balance of
$7,000, which included an under-collection of $382,000 accrued prior to November
29, 2001 and an over-collection of $389,000 accrued for the period from November
30, 2001 through December 31, 2003. The net-under-collected
11
balance of $262,000 as of December 31, 2002 included the aforementioned
under-collection of $382,000 and an over-collection of $120,000 accrued for the
period from November 30, 2001 through December 31, 2002. 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 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 San Jose Water Company's experiences in unaccounted-for water.
Actual results will differ from those estimates, which would result in operating
revenue being adjusted in the period that the revision to the San Jose Water
Company's estimates is determined. As of December 31, 2003 and 2002, accrued
unbilled revenue was $6,205,000 and $6,605,000, respectively. Unaccounted for
water for 2003, 2002 and 2001 approximated 6.9%, 6.6% and 6.7%, respectively, as
a percentage of production. The estimate is based on the results of past
experience, the trend and efforts in reducing the company's unaccounted for
water through mains replacement and lost water reduction programs. A 0.1% change
in unaccounted for water affects unbilled revenue by approximately $100,000.
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 and credits are recoverable in the future revenue of the San Jose
Water Company through the ratemaking process. The regulatory assets and
liabilities recorded by San Jose Water Company primarily relate to the
recognition of deferred income taxes for ratemaking versus tax accounting
purposes. The disallowance of any asset in future ratemaking purposes, including
the deferred regulatory assets, would require San Jose Water Company to
immediately recognize the impact of the costs for financial reporting purposes.
No disallowance had to be recognized at December 31, 2003 and December 31, 2002.
The net regulatory assets recorded by San Jose Water Company were $7,976,000 and
$6,013,000 as of December 31, 2003 and 2002, respectively. The increase was
primarily due to recognition of asset retirement obligations in accordance with
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations", which was adopted on January 1, 2003.
Income Taxes
SJW Corp. estimates its federal and state income taxes as part of the
process of preparing the financial statements. The process involves estimating
the actual current tax exposure together with assessing temporary differences
resulting from different treatment of items for tax and accounting purposes,
including the evaluation of the treatment acceptable in the water utility
industry and its regulatory agency. These differences result in deferred tax
assets and liabilities, which are included within the balance sheet. If actual
results, due to changes in the regulatory treatment, or significant changes in
tax-related estimates or assumptions or changes in law, differ materially from
these estimates, the provision for income taxes will be materially impacted.
Pension Accounting
San Jose Water Company offers a defined benefit plan, Supplemental
Executive Retirement Plan and certain post-retirement benefits other than
pensions to employees retiring with a minimum level of service. Accounting for
pensions and other post-retirement benefits requires an extensive use of
assumptions about the discount rate, expected return on plan assets, the rate of
future compensation increase received by the employees, mortality, turnover and
medical costs. See assumptions and disclosures detailed in Note 11 of "Notes to
Consolidated Financial Statements".
12
San Jose Water Company, through its Retirement Plan Administrative
Committee managed by the representatives from the unions and management
establishes investment guidelines with specification that at least 30% of the
investments are in bonds or cash. As of December 31, 2003, the plan assets
consist of approximately 22% bonds, 11% cash and 67% equities. Furthermore,
equities are to be diversified by industry groups to balance for capital
appreciation and income. In addition, all investments are publicly traded. San
Jose Water Company uses an expected rate of return on plan assets of 8% in its
actuarial computation. The distributions of assets are not considered highly
volatile and sensitive to changes in market rates and prices. Furthermore,
foreign assets are not included in the investment profile and thus risk related
to foreign exchange fluctuation is eliminated.
The market values of the plan assets are marked to market at the
measurement date. The investment trust assets suffered unrealized market losses
in the three years prior to 2003. As a result of this, the pension expense in
2003 included the amortization of unrealized market losses on pension assets.
Unrealized market losses on pension assets are amortized over 14 years for
actuarial expense calculation purposes. Market losses in 2002 increased expense
by approximately $1,131,000 in 2003, and similar market losses in 2001 increased
expense by approximately $700,000 in 2002.
The company utilizes Moody's 'A' and 'Aa' rated bonds in industrial,
utility and financial sectors with an outstanding amount of $1 million or more
in determining the discount rate used in calculating the liabilities at the
measurement date. The composite discount rates used were 6.25% and 6.75% for the
years ending December 31, 2003 and 2002, respectively. As a result of the
decrease in discount rate used, the pension liability of SJW Corp. increased.
Stock-Based Compensation Plans
SJW Corp. has a stockholder-approved long-term incentive plan that
allows granting of nonqualified stock options, performance shares and dividend
units. Under the plan, a total of 900,000 common shares are authorized for
option awards and grants. The Corporation has adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation",
utilizing the Black-Scholes option-pricing model to compute the fair value of
options at grant date as basis for the stock-based compensation for financial
reporting purposes. The weighted-average assumptions utilized include: expected
dividend yield - 3.4%, expected volatility - 27%, risk-free interest rate -
2.86%, expected holding period - five years.
In addition to the option grants, SJW Corp. has granted restricted stock
units to a key employee of the Corporation, which were valued at market price at
the date of grant. The Corporation is correspondingly recognizing the fair
market value of the restricted stock granted as compensation expense, over the
vesting period of three years.
Additionally, the restricted stock units granted to the non-employee Board
members from the conversion of cash pension benefits were valued at market price
at the date of grant. The Corporation is correspondingly recognizing the fair
market value of the unvested restricted stock granted as compensation expenses,
over the vesting period of three years.
13
Results of Operations:
Overview
SJW Corp.'s consolidated net income for twelve months ending December 31,
2003 was $18,677,000, compared to $14,232,000 for the same period in 2002. The
increase of $4,445,000 or 31% includes an after-tax gain of $3,030,000 from the
sale of a SJW Land Company property in the first quarter of 2003. Favorable
weather conditions brought greater availability of the less costly surface water
supply to SJW Corp. in 2003 resulting in reduced water production costs and
increased net income.
Operating Revenue
Consolidated Operating Revenue
2003 2002 2001
----------- --------- ----------
(in thousands)
San Jose Water Company ................... $146,132 143,092 134,047
SJW Land Company ......................... 2,374 1,860 1,752
Crystal Choice Water Service LLC ......... 1,226 700 284
-------- ------- -------
$149,732 145,652 136,083
======== ======= =======
The change in consolidated operating revenue was due to the following
factors:
2003 vs 2002 2002 vs 2001
Increase/(decrease) Increase/(decrease)
------------------------ ------------------
(in thousands)
Utility:
Consumption changes ...................... $ (5,117) (3%) $ (198) -
New customers increase ................... 353 - 89 -
Rate increases ........................... 7,804 5% 9,154 7%
Parking and lease ........................ 514 - 108 -
Crystal Choice Water Service LLC ......... 526 1% 416 -
-------- -- ------- ---
$ 4,080 3% $ 9,569 7%
======== == ======= ===
2003 vs. 2002
The revenue increase consists of $3,040,000 from San Jose Water Company,
and $1,040,000 from SJW Land Company and Crystal Choice Water Service LLC. The
increase in revenue in San Jose Water Company was mainly due to cumulative rate
increases from January through July 2003, which was partially offset by a
decrease in customer consumption. The rate increases resulted from San Jose
Water Company's latest general rate case application and an offset rate increase
for production costs adjustments in July 2003. SJW Land Company's lease revenue
increased $514,000 primarily due to the addition of two commercial properties in
March 2003 to its portfolio. Crystal Choice Water Service LLC's revenue
increased $526,000 over 2002 due to an improved marketing strategy.
2002 vs. 2001
Consolidated operating revenue for 2002 increased by $9,569,000 or 7% over
2001 mainly due to two rate increases during the period from January through
July 2002. This resulted from San Jose Water Company's general rate case
application in April 2001 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.
Crystal Choice Water Service LLC's revenue increased $416,000 over 2001 due to
an improved marketing strategy.
14
The following table represents operating revenues and number of customers
by customer group of San Jose Water Company:
Operating Revenue by Customer Group
2003 2002 2001
----------- --------- ----------
(in thousands)
Residential and Business ......... $134,121 130,784 122,345
Industrial ....................... 980 1,060 1,017
Public Authorities ............... 7,856 8,174 7,827
Others ........................... 3,175 3,074 2,858
-------- ------- -------
$146,132 143,092 134,047
======== ======= =======
Number of Customers
2003 2002 2001
--------- --------- ----------
Residential and Business ......... 215,029 214,378 214,133
Industrial ....................... 91 92 98
Public Authorities ............... 1,689 1,664 1,653
Others ........................... 3,291 3,266 3,116
------- ------- -------
220,100 219,400 219,000
======= ======= =======
Operating Expense
Operating Expense by Subsidiary
2003 2002 2001
----------- --------- ----------
(in thousands)
San Jose Water Company ................... $123,422 122,074 114,285
SJW Land Company ......................... 1,463 1,318 1,303
Crystal Choice Water Service LLC ......... 1,408 1,052 778
SJW Corp. ................................ 485 650 (110)
-------- ------- -------
$126,778 125,094 116,256
======== ======= =======
Operating expense increased $1,684,000 or 1% in 2003 compared to 2002, and
$8,838,000 or 8% in 2002 compared to 2001.
15
The change in operating expense was due to the following:
2003 vs 2002 2002 vs 2001
Increase/(decrease) Increase/(decrease)
------------------------ ------------------
(in thousands)
Water Production costs:
Increased surface water supply ...................... $ (3,879) (3%) $ (250) -
Usage and new customers ............................. (3,742) (3%) (382) -
Pump tax and purchased water price increase ......... 4,269 4% 1,910 1%
Energy prices ....................................... (696) (1%) 344 -
-------- -- ------- ---
Total water production costs ........................ (4,048) (3%) 1,622 1%
Administrative and general ............................. 2,736 2% 2,218 2%
Other operating expense ................................ 416 - 1,141 1%
Maintenance ............................................ (142) - 776 1%
Property taxes and other non-income taxes .............. 645 - 41 -
Depreciation and amortization .......................... 1,212 1% 773 1%
Income taxes ........................................... 865 1% 2,267 2%
-------- -- ------- ---
$ 1,684 1% $ 8,838 8%
======== == ======= ===
The various components of operating expenses are discussed below.
Water production costs
2003 vs. 2002
Total water production costs decreased $4,048,000 in 2003 in comparison to
2002. The decrease in water production costs was primarily attributable to the
greater availability of the less costly surface water supply and a decrease in
customer consumption, partially offset by increases in rates of purchased water
and pump tax from Santa Clara Valley Water District (SCVWD) which commenced in
July 2003. Water production was lower than in 2002 by 2,475 MG (million
gallons), and was consistent with the changes in customer consumption.
2002 vs. 2001
The increase in production costs in 2002 as compared to 2001, was
primarily due to an increase in SCVWD water production rates (pump tax and
purchased water) effective 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 San Jose Water
Company's distribution mix and optimal pumping pattern for 2002.
Sources of Supply
2003 2002 2001
--------- -------- ---------
(million gallons)
Purchased water .............................. 27,376 30,566 27,833
Ground water ................................. 16,168 18,430 21,368
Surface water ................................ 5,670 2,661 2,515
Reclaimed water .............................. 379 411 406
------ ------ ------
49,593 52,068 52,122
====== ====== ======
Average water production cost per MG ......... $ 1,209 1,229 1,196
======= ====== ======
San Jose Water Company's water supply consists of groundwater from wells,
surface water from watershed run-off and diversion, and imported water purchased
from the SCVWD. Surface water is the
16
least expensive source of water and increased reliance on surface water due to
its greater availability in 2003 reduced water production costs by
approximately $3,879,000. In 2002, however, San Jose Water Company purchased
more imported water than pumped water, which became more expensive as a result
of an increase in energy costs.
Water production in 2003 decreased 2,475 million gallons from 2002. During
2003, the availability of the surface water was significantly greater than in
2002. Water production in 2002 decreased 54 million gallons over 2001. The
changes are consistent with the related operating expenses.
Administrative, General and Other Operating Expense
The following table represents components of administrative, general and
other operating expense:
Administrative, General and Other Operating Expense
2003 2002 2001
---------- -------- --------
(in thousands)
Source of supply ...................... $ 704 732 757
Water treatment and quality ........... 1,541 1,539 1,516
Pumping ............................... 1,394 1,407 1,296
Transmission and distribution ......... 2,979 2,877 2,796
Customer accounts ..................... 4,403 4,186 3,599
Administrative and general ............ 16,202 13,466 11,248
Others ................................ 1,083 947 583
------- ------ ------
$28,306 25,154 21,795
======= ====== ======
2003 vs. 2002
Administrative, general and other operating expense included expenses
incurred in maintaining the water system, delivering the water supply, testing
the water quality, providing customer service and general administration
functions.
Administrative, general and other operating expense in 2003 increased
$3,152,000 or 13% compared to 2002. The increases consisted primarily of: (1)
$1,326,000 in salaries and wages in accordance with bargaining unit wage
escalation which was incurred in all departments, (2) $1,131,000 in pension
costs primarily as a result of the decline in the market value of retirement
trust assets, and (3) $980,000 in business and employee insurance costs.
2002 vs. 2001
Administrative, general and other operating expense in 2002, increased
$3,359,000 or 15% 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 business and employee insurance costs.
Maintenance Expense
Maintenance expense decreased $142,000 or 2% in 2003 compared to 2002, and
increased $776,000 or 11% in 2002 compared to 2001. The level of maintenance
expense varied with the level of public work projects instituted by the
government, weather condition and the timing and nature of the facilities
failure occurrence.
Property Taxes and Other Non-Income Taxes
Property taxes and other non-income taxes for 2003 increased $645,000 in
comparison to 2002 due primarily to the receipt of $299,000 property tax
adjustments in 2002 for the taxes on properties paid in prior years.
17
Depreciation
Depreciation expense increased $1,212,000 and $773,000 in 2003 and 2002
respectively, due to higher investments in utility plants.
Income Tax Expense
Income tax expense for 2003 excluding taxes on gain on sale of property of
$2,105,000, was $10,523,000 compared to $9,658,000 for 2002, representing an
increase of $865,000 or 9% due to higher earnings in 2003.
The effective consolidated income tax rates for 2003, 2002, and 2001 were
41%, 40%, and 35%, respectively. The 2001 effective tax rate was below the rates
for the subsequent 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
Other income for the year ended December 31, 2003 included an after-tax
gain of $3,030,000 on the sale of a nonutility property. In April 2003, SJW
Corp. reinvested the sale proceeds in two income properties in the states of
Connecticut and Florida. Please refer to Note 13 "Sale of Nonutility Property"
under Notes to Consolidated Financial Statements.
Interest expense increased $668,000, or 9%, due to the issuance of Senior
Notes Series G in September 2003, execution of two mortgages in connection with
the purchases of two income properties in the states of Connecticut and Florida,
and higher average borrowing in 2003. SJW Corp.'s consolidated weighted average
cost of long-term debt, including the two mortgages acquired in 2003 and the
amortization of debt issuance costs, was 7.5% for the year ended December 31,
2003 and 7.9% for the years ended December 31, 2002 and 2001.
Other comprehensive income in 2003 was $2,035,000 which included an
unrealized gain adjustment of $2,434,000 on the upturn in the market value of
investment in California Water Service Group, offset by an increase of $399,000
in comprehensive loss associated with the Corporation's minimum pension
liability.
Liquidity and Capital Resources:
San Jose Water Company's budgeted capital expenditures for 2004, exclusive
of capital expenditures financed by customer contributions and advances, are as
follows:
Budgeted Capital
Expenditures
2004
--------------------
(in thousands)
Water treatment ..................... $ 668 2%
Reservoirs and tanks ................ 1,943 6%
Pump stations and equipment ......... 2,434 8%
Distribution system ................. 17,926 58%
Equipment and other ................. 8,187 26%
------- ---
$31,158 100%
======= ===
The 2004 capital expenditures budget is concentrated in main replacements.
Approximately $12,000,000 will be spent to replace San Jose Water Company's
pipes and mains which is funded through working capital.
Starting in 1997, San Jose Water Company began a four-phased
Infrastructure Study establishing a systematic approach to replace its utility
facilities. Phase I and II of the Infrastructure Study analyzed the company's
pipes and mains. Phase III and IV examined all other utility facilities. The
Infrastructure Study was completed in July, 2002 and is being used as a guide
for future capital improvement programs, and will serve as the master plan for
the company's replacement program for the next 20 years.
18
San Jose Water Company's capital expenditures are incurred in connection
with normal upgrading and expansion of existing facilities and to comply with
environmental regulations. The company expects to incur approximately
$176,000,000 in capital expenditures, which includes replacement of pipes and
mains, and maintaining water systems, over the next five years, exclusive of
customer contributions and advances. The company's actual capital expenditures
may vary from its projections due to changes in the expected demand for
services, weather patterns, actions by governmental agencies and general
economic conditions. Total additions to utility plant normally exceed
company-financed additions by several million dollars because certain new
facilities are constructed using advances from developers and contributions in
aid of construction.
A substantial portion of San Jose Water Company's distribution system was
constructed during the period from 1945 to 1980. Expenditure levels for renewal
and modernization of this part of the system will grow at an increasing rate as
these components reach the end of their useful lives. In most cases, replacement
cost will significantly exceed the original installation cost of the retired
assets due to increases in the costs of goods and services.
In 2003, SJW Corp. invested an additional $75,000 in Crystal Choice Water
Service LLC related to its 75% share of capital investment. SJW Corp. does not
expect to make a significant cash contribution in Crystal Choice Water Service
LLC in 2004.
In 2003, there was an increase in the common dividends declared and paid
on SJW Corp.'s common stock representing 47% of the net income for 2003.
Historically, SJW Corp. has maintained its dividend payment ratio at
approximately 50% of its earnings.
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
San Jose Water Company's ability to finance future construction programs
and sustain dividend payments depends on its ability to attract external
financing and maintain or increase internally generated funds. The level of
future earnings and the related cash flow from operations is dependent, in large
part, upon the timing and outcome of regulatory proceedings.
San Jose Water Company's financing activity is designed to achieve a
capital structure consistent with regulatory guidelines of approximately 50%
debt and 50% equity.
Company internally-generated funds, which includes allowance for
depreciation and deferred income taxes, have provided approximately 50% of the
future cash requirements for San Jose Water Company's capital expenditure. Due
to its strong cash position and low financial leverage condition, funding for
its future capital expenditure program will be provided primarily through
long-term debt. San Jose Water Company and its parent, SJW Corp. do not
anticipate the issuance of any common equity to finance future capital
expenditure.
San Jose Water Company has outstanding $130,000,000 of unsecured senior
notes as of December 31, 2003. The senior note agreements of San Jose Water
Company generally have terms and conditions that restrict the company from
issuing additional funded debt if (1) the funded debt would exceed 66 2/3% of
total capitalization, and (2) net income available for interest charges for the
trailing twelve calendar month period would be less than 175% of interest
charges. As of December 31, 2003, San Jose Water Company's funded debt was 48.6%
of total capitalization and the net income available for interest charges was
391% of interest charges.
San Jose Water Company issued $20,000,000 of Senior Notes Series G on
September 2, 2003. Proceeds from the sales of the Senior Notes Series G were
used to repay short-term borrowings and to fund construction expenditures.
19
In 2002, the Department of Water Resources approved San Jose Water
Company's application for an approximately $2,500,000 Safe Drinking Water State
Revolving Fund twenty-year loan at an interest rate of 2.39%. Funds in the above
amount will be received for the retrofit of San Jose Water Company's water
treatment plant. As of December 31, 2003, the loan has not been funded. San Jose
Water Company will request the funding in 2004 as soon as all the loan
documentation and contract requirements are met.
SJW Land Company
In March 2003, SJW Land Company sold nonutility property and recognized a
gain of $3,030,000, net of tax. Subsequently, SJW Land Company reinvested the
proceeds from the sale of nonutility property by acquiring two properties in the
states of Connecticut and Florida. In connection with the acquisition, SJW Land
Company executed mortgages in the amount of $9,900,000 in April 2003. The
mortgage loans are due in ten years and amortize over twenty-five years with a
fixed interest rate of 5.96%. The loan agreements generally restrict the company
from prepayment in the first five years and requires submission of periodic
financial reports as part of the loan covenants. The properties were leased to a
multinational company for twenty years.
SJW Corp.
SJW Corp.'s consolidated long-term debt was 46% of total capitalization as
of December 31, 2003 which is below the industry average published in the C.A.
Turner's Utilities Report. SJW Corp. enjoys a low debt burden and strong
liquidity, is fully capable of providing financial flexibility to future
regulated and nonregulated growth opportunities and capital expenditure
requirements.
SJW Corp. and its subsidiaries have an unsecured line 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, 2003, SJW Corp.
and its subsidiaries had available unused short-term bank line of credit of
$30,000,000. Cost of borrowing averaged 2.57% for the twelve months of 2003. The
line of credit expires on July 1, 2005.
SJW Corp.'s contractual obligation and commitments as of December 31, 2003
are as follows:
Contractual Obligations
(dollars in thousands)
Due in
-----------------------------------------------
Less than 1-5 After
Total 1 year Years 5 Years
----------- -------- --------- ----------
Senior notes ............................... $130,000 - - 130,000
Mortgages .................................. 9,799 184 1,101 8,514
Advance for construction ................... 79,311 2,024 9,158 68,129
Other ...................................... 891 431 460 -
-------- ----- ------ -------
Total contractual cash obligations ......... $220,001 2,639 10,719 206,643
======== ===== ====== =======
In addition to all the obligations listed above, San Jose Water Company
purchases water from Santa Clara Valley Water District (SCVWD) under terms of a
master contract 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 ($27,300,000) of water, from SCVWD
in the contract year ending June 30, 2004.
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 with an outstanding balance of $4,333,000 as of
December 31, 2003 which was secured by the partnership property. The mortgage
loan is non-recourse to SJW Land Company.
20
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% limited partnership interest. A commercial
building is constructed on the partnership property and is leased to an
international real estate firm under a twelve-year 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%. This rate of return is within the range of recent
rates of return authorized by the CPUC for water utilities. San Jose Water
Company received a step rate increase in January 2003 totaling about 3% to
recover projected operating cost increase for 2003. Additionally, San Jose Water
Company received offset rate increases in March and July 2003, totaling about
$6,000,000 or approximately 4%, to recover the increased cost primarily
associated with the transfer of the maintenance responsibility for approximately
12,000 fire hydrants from the City of San Jose to San Jose Water Company, as
well as the increased cost of purchased water and higher pump tax charged to San
Jose Water Company by the SCVWD. On May 23, 2003, San Jose Water Company filed a
General Rate Case application with the CPUC to increase rates by $25,793,000 or
18.2% in 2004, $5,434,000 or 3.2% in 2005, and $5,210,000 or 3.0% in 2006. San
Jose Water Company is seeking these proposed increases to cover higher costs of
providing water service, including higher costs of power, purchased water, pump
tax, labor, security, water quality testing and reporting, and to allow for
necessary improvements to the water system. San Jose Water Company is also
requesting rate recovery of the current balance of $71,000 in its Water
Contamination Memorandum Account, as well as recovery of an under-collection of
$382,000 accrued in its pre-November 29, 2001 Balancing Account. Finally, San
Jose Water Company is requesting a rate of return on equity of 11.5% for the
years 2004 through 2006. A CPUC decision on the application is expected in early
2004.
On September 30, 2002, the interim rate relief bill (AB 2838) was signed
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 principal, this mechanism is designed to eliminate
the adverse financial impact on water utilities caused by regulatory delays in
general rate cases. The bill went into effect on January 1, 2003. Since a CPUC
decision on the requested rates on the General Rate Case application filed with
the CPUC on May 23, 2003 has not been issued as of December 31, 2003, the CPUC
has allowed San Jose Water Company an interim rate increase of approximately 2%
effective January 1, 2004.
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
21
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 future 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 CPUC 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 authorizing water utilities to 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. San Jose Water Company had accrued an
under-collection of $382,000 in its balancing account prior to November 29,
2001. San Jose Water Company requested rate recovery of the aforementioned
under-collection of $382,000 in its General Rate Case application filed with the
CPUC on May 23, 2003. At this time, it is unclear whether San Jose Water
Company's ability to recover the aforementioned balancing account balance will
be impacted. This under-collection of $382,000 is the component of the balance
of balancing account as of December 31, 2003 and 2002, respectively.
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 such balance or to receive future offset rate
relief. For the period from November 29, 2001 to December 31, 2003, the
balancing account accumulated an over-collection of $7,000. At December 31,
2002, the balancing account, including the balances accrued prior to November
29, 2001, had an under-collection of $262,000.
On June 19, 2003 the CPUC issued its final OIR decision (D.03-06-072) in
which the CPUC revised the existing procedures for recovery of under-collections
and over-collections in balancing accounts existing on or after November 29,
2001 as follows: (1) If a utility is within its rate case cycle and is not over
earning, the utility shall recover its balancing account subject to
reasonableness review; and (2) If a utility is either within or outside of its
rate case cycle and is over earning, the utility's recovery of expenses from the
balancing accounts will be reduced by the amount of the over earning, again
subject to reasonableness review. Utilities shall use the recorded rate of
return means test to evaluate earnings for all years. The CPUC is currently in
the process of scheduling workshops to determine how these new requirements will
ultimately be implemented.
As of December 31, 2003 San Jose Water Company has received all its offset
rate requests. Any future impact on San Jose Water Company's ability to recover
balancing account balances and receive offset rate increases cannot be
determined until San Jose Water Company's next offset rate increase request
scheduled for July, 2004.
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 SCVWD, surface water from its Santa Cruz
Mountains 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.
22
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 Mountains 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) system
software applications that control pumps 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. Conservation efforts, construction codes which require
the use of low-flow plumbing fixtures could affect water consumption.
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 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
23
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.
New 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 conducted a system-wide vulnerability assessment in
compliance with federal regulations Public Law 107-188 imposed on all water
utilities. The assessment report was filed with the EPA on 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.
The vulnerability assessment identified system security enhancements that
impact water quality, health, safety and continuity of service totaling
approximately $2,300,000, exclusive of the years 2001 to 2002 expenditures.
These improvements were incorporated into the capital budgets to be completed by
2005. For the year ended December 31, 2003 $540,000 was spent on capital
projects to improve and enhance security. 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
24
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 $1,113,000 in 2003 primarily due to the
decline in valuation of the retirement plan portfolio. Market
conditions, not changes in operating risk or loss experience, was
the primary reason for the average liability insurance cost increase
of 25% in 2003. Employee medical insurance increased approximately
8%. Medical, liability and pension expenses are expected to continue
to have similar increases in 2004.
Nonregulated Operations
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. On April 11, 2003, VTA
filed the eminent domain lawsuit. As a part of the proceedings, VTA has
transferred funds from the escrow account into a court deposit account to secure
its ongoing right of possession for construction of the light rail station
pending final litigation. Compensation for the taking of property will be
determined by the court or by way of settlement between SJW Land Company and
VTA. This transaction will be recorded and it is expected to result in an
increase to net income when the compensation issue is settled or a final court
order is rendered.
Impact of Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities".
Subsequently in December 2003, the FASB issued revised Interpretation No. 46(R).
This interpretation provides guidance for determining when a primary beneficiary
should consolidate a variable interest entity or equivalent structure, that
functions to support the activities of the primary beneficiary. The revised
interpretation is effective for the periods ending after March 15, 2004. The
adoption of this statement will not have a material impact on SJW Corp.'s
financial condition or results of operations.
25
Effective January 1, 2003, SJW Corp. adopted Statement of Financial
Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations", which requires businesses to record the fair value of a liability
for a legal obligation to retire an asset in the period in which the liability
is incurred. A legal obligation is a liability that a party is required to
settle as a result of an existing or enacted law, statute, ordinance or
contract. SJW Corp.'s legal obligations for retirement reflect principally the
retirement of wells, which by law need to be disposed of at removal. Retirement
cost has historically been recovered through rates at the time of retirement. As
a result, the cumulative effect upon adoption was reflected as a regulatory
asset, in the amount of $1,200,000 as of December 31, 2003.
In December 2003, the FASB issued SFAS No. 132 (revised), "Employers'
Disclosures about Pensions and Other Postretirement Benefits", which revises
employers' disclosures about pension plans and other postretirement benefit
plans. This revised statement retains and revises the disclosure requirement
contained in the original SFAS No. 132 and does not change the current
measurement or recognition requirements for such plans. The revised statement
also requires additional disclosures about the assets, obligations, cash flows,
and net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. SJW Corp. has adopted SFAS No. 132 (revised) as of
December 31, 2003.
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.
26
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, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, 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 29, 2004
27
SJW CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
-------------------------
2003 2002
------------ ----------
ASSETS
UTILITY PLANT ........................................................ $ 575,869 534,079
INTANGIBLE ASSETS .................................................... 7,840 7,840
--------- -------
583,709 541,919
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION ....................... 174,985 161,576
--------- -------
408,724 380,343
--------- -------
NONUTILITY PROPERTY, NET ............................................. 27,629 10,487
CURRENT ASSETS:
Cash and equivalents ................................................ 10,036 324
Accounts receivable:
Customers .......................................................... 7,505 7,309
Other .............................................................. 1,333 2,807
Accrued unbilled utility revenue .................................... 6,205 6,605
Materials and supplies .............................................. 485 499
Prepaid expenses .................................................... 1,534 1,155
--------- -------
27,098 18,699
--------- -------
OTHER ASSETS:
Investment in California Water Service Group ........................ 30,139 26,014
Investment in joint venture ......................................... 1,110 1,144
Unamortized debt issuance and reacquisition costs ................... 3,447 3,493
Regulatory assets ................................................... 7,976 6,013
Other ............................................................... 5,594 7,030
--------- -------
48,266 43,694
--------- -------
$ 511,717 453,223
========= =======
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Shareholders' equity:
Common stock, $1.042 par value; authorized 18,000,000 shares; issued
and outstanding 9,135,441 shares .................................. $ 9,516 9,516
Additional paid-in capital ......................................... 13,375 12,357
Retained earnings .................................................. 138,058 128,242
Accumulated other comprehensive income ............................. 5,419 3,384
--------- -------
Total shareholders' equity .......................................... 166,368 153,499
Long-term debt, less current portion ................................ 139,614 110,000
--------- -------
305,982 263,499
--------- -------
CURRENT LIABILITIES:
Line of credit ...................................................... - 11,450
Current portion of long-term debt ................................... 184 -
Accrued pump taxes and purchased water .............................. 3,224 3,144
Purchased power ..................................................... 864 1,219
Accounts payable .................................................... 2,217 381
Accrued interest .................................................... 3,619 3,244
Accrued taxes ....................................................... 467 634
Accrued payroll ..................................................... 759 566
Work order deposit .................................................. 1,511 834
Other current liabilities ........................................... 2,231 2,128
--------- -------
15,076 23,600
--------- -------
DEFERRED INCOME TAXES ................................................ 36,232 27,670
UNAMORTIZED INVESTMENT TAX CREDITS ................................... 1,975 2,034
ADVANCES FOR CONSTRUCTION ............................................ 79,311 70,597
CONTRIBUTIONS IN AID OF CONSTRUCTION ................................. 61,811 56,117
DEFERRED REVENUE ..................................................... 1,327 1,350
OTHER NONCURRENT LIABILITIES ......................................... 10,003 8,356
COMMITMENTS AND CONTINGENCIES ........................................
--------- -------
$ 511,717 453,223
========= =======
See accompanying Notes to Consolidated Financial Statements.
28
SJW CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31 (in thousands, except share and per share data)
2003 2002 2001
------------ ------------- -------------
OPERATING REVENUE ............................................. $ 149,732 145,652 136,083
OPERATING EXPENSE:
Operation:
Purchased water ............................................ 36,708 38,228 33,500
Power ...................................................... 5,296 6,805 7,814
Pump taxes ................................................. 17,931 18,950 21,047
Administrative and general ................................. 16,202 13,466 11,248
Other ...................................................... 12,104 11,688 10,547
Maintenance .................................................. 7,724 7,866 7,090
Property taxes and other nonincome taxes ..................... 5,065 4,420 4,379
Depreciation and amortization ................................ 15,225 14,013 13,240
Income taxes ................................................. 10,523 9,658 7,391
---------- --------- ---------
126,778 125,094 116,256
---------- --------- ---------
OPERATING INCOME .............................................. 22,954 20,558 19,827
OTHER (EXPENSE) INCOME:
Interest expense ............................................. (8,471) (7,803) (6,737)
Gain on sale of nonutility property, net ..................... 3,030 - -
Dividends .................................................... 1,237 1,232 1,226
Other, net ................................................... (73) 245 (299)
---------- --------- ---------
NET INCOME ................................................. $ 18,677 14,232 14,017
========== ========= =========
OTHER COMPREHENSIVE INCOME/(LOSS):
Unrealized income/(loss) on investment, net of taxes of $1,691
in 2003, ($947) in 2002, and ($564) in 2001 ................ 2,434 (1,363) (811)
Minimum pension liability adjustment, net of taxes of $276 in
2003, $220 in 2002, and $236 in 2001 ....................... (399) (319) (343)
---------- --------- ---------
Other comprehensive income/(loss) .......................... 2,035 (1,682) (1,154)
---------- --------- ---------
COMPREHENSIVE INCOME ...................................... $ 20,712 12,550 12,863
========== ========= =========
EARNINGS PER SHARE ............................................
- Basic ..................................................... $ 2.04 1.56 1.53
- Diluted ................................................... $ 2.04 1.56 1.53
========== ========= =========
COMPREHENSIVE INCOME PER SHARE
- Basic ..................................................... $ 2.27 1.37 1.41
- Diluted ................................................... $ 2.26 1.37 1.41
========== ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
- Basic ..................................................... 9,135,441 9,135,441 9,135,441
- Diluted ................................................... 9,148,476 9,135,441 9,135,441
========== ========= =========
See accompanying Notes to Consolidated Financial Statements.
29
SJW CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Shareholders'
Stock Capital Earnings Income/(loss) Equity
---------- ------------ ----------- --------------- --------------
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
Net income ............................ - - 18,677 - 18,677
Other comprehensive loss
Unrealized gain on investment, net of
tax effect of $1,691 ............... - - - 2,434 2,434
Minimum pension liability adjustment,
net of tax effect of $276 .......... - - - (399) (399)
-------
Comprehensive income .................. - - - - 20,712
Stock-based compensation .............. - 1,018 - - 1,018
Dividends paid ........................ - - (8,861) - (8,861)
------- ------ ------- ------ -------
BALANCES, DECEMBER 31, 2003 ............ $ 9,516 13,375 138,058 5,419 166,368
======= ====== ======= ====== =======
See accompanying Notes to Consolidated Financial Statements.
30
SJW CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 (in thousands)
2003 2002 2001
----------- ----------- -----------
OPERATING ACTIVITIES:
Net income ................................................ $ 18,677 14,232 14,017
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ........................... 15,225 14,013 13,240
Deferred income taxes ................................... 6,398 2,998 1,993
Stock-based compensation ................................ 492 - -
Gain on sale of nonutility property, net of taxes ....... (3,030) - -
Changes in operating assets and liabilities:
Accounts receivable and accrued utility revenue ........ 1,678 (2,623) (973)
Accounts payable, purchased power and other current
liabilities .......................................... 1,584 (134) 742
Accrued pump taxes and purchased water ................. 80 53 (1,538)
Accrued taxes .......................................... (167) (548) 916
Accrued interest ....................................... 375 108 347
Accrued payroll ........................................ 193 145 (54)
Work order deposits .................................... 677 398 101
Other noncurrent assets and noncurrent liabilities ..... (1,984) 2,446 685
Accrued employee compensation .......................... - - (3,024)
Refund due to customers ................................ - (531) (541)
Other changes, net ..................................... 1,789 (1,466) (457)
--------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................. 41,987 29,091 25,454
--------- ------- -------
INVESTING ACTIVITIES:
Additions to utility plant ................................ (44,467) (37,119) (47,672)
Additions to nonutility property .......................... (17,875) (477) (330)
Cost to retire utility plant, net of salvage .............. (780) (1,352) (1,302)
Proceeds from sale of nonutility property ................. 5,370 - -
--------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES ...................... (57,752) (38,948) (49,304)
--------- ------- -------
FINANCING ACTIVITIES:
Borrowings from line of credit ............................ 14,000 50,763 61,375
Repayments of line of credit .............................. (25,450) (50,813) (61,075)
Long-term borrowings ...................................... 29,900 - 20,000
Repayments of long-term borrowings ........................ (102) - -
Dividends paid ............................................ (8,861) (8,405) (7,834)
Receipts of advances and contributions in aid of
construction ............................................ 17,694 15,242 17,246
Refunds of advances for construction ...................... (1,704) (1,627) (1,624)
--------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................. 25,477 5,160 28,088
--------- ------- -------
NET CHANGE IN CASH AND EQUIVALENTS ......................... 9,712 (4,697) 4,238
CASH AND EQUIVALENTS, BEGINNING OF YEAR .................... 324 5,021 783
--------- ------- -------
CASH AND EQUIVALENTS, END OF YEAR .......................... $ 10,036 324 5,021
========= ======= =======
Cash paid during the year for:
Interest .................................................. $ 9,148 7,782 7,730
Income taxes .............................................. $ 7,720 8,800 4,188
See accompanying Notes to Consolidated Financial Statements.
31
SJW CORP. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002, and 2001
(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. All intercompany
transactions and balances have been eliminated on consolidation. 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 92% 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, several undeveloped real
estate, some properties in the states of Florida and Connecticut, and a 70%
limited partnership interest in 444 West Santa Clara Street, L.P., which is
accounted for under the equity method.
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 2003, 2002, and 2001 was
$266, $603, and $617, respectively. Construction in progress was $4,000, $5,720,
and $9,303, at December 31, 2003, 2002, and 2001, 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 2003,
2002, and 2001 the aggregate provisions for depreciation approximated 3.2%,
3.3%, and 3.3%, 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.
Depreciation expense for the years ended December 31, 2003, 2002, and 2001 was
$14,435, $13,480, and $12,659, respectively.
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. 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.
Intangible Assets
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
32
SJW CORP. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002, and 2001 - (Continued)
(Dollars in thousands, except share data)
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. Cash equivalents are stated at
cost plus accrued interest, which approximates fair value. The cash and
equivalents balances as of December 31, 2003 are $10,036 which included $4,036
cash deposited in bank and $6,000 short-term investment. The cash and
equivalents balances as of December 31, 2002 are $324 which represented cash
deposited in bank.
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 considered an
available-for-sale marketable security and 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, net of taxes, 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 issuance costs are amortized over the lives of the respective debt
issues. Debt reacquisition costs paid on the early redemption of debt and
unamortized original issuance costs are deferred and amortized over the life of
the new debt.
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 tax rates expected to apply in future years.
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
33
SJW CORP. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002, and 2001 - (Continued)
(Dollars in thousands, except share data)
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 2004 are $2,024.
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.
Asset Retirement Obligations
Effective January 1, 2003, SJW Corp. adopted Statement of Financial
Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations," which requires businesses to record the fair value of a liability
for a legal obligation to retire an asset in the period in which the liability
is incurred. A legal obligation is a liability that a party is required to
settle as a result of an existing or enacted law, statute, ordinance or
contract. SJW Corp.'s legal obligations for asset retirements reflect
principally the retirement of wells, which by law need to be disposed of at
removal. Retirement costs have historically been recovered through rates at the
time of retirement. As a result, the cumulative effect upon adoption was
reflected as a regulatory asset. For the year ended December 31, 2003, SJW Corp.
recorded the cumulative effect of an asset retirement obligation of $4,700 at
its net present value of $1,200 as a regulatory asset, with a corresponding
liability in other non-current liabilities.
Revenue
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. Operating revenue in 2003, 2002, and 2001 includes $3,339,
$3,257, and $2,912 respectively, from the operation of the City of Cupertino
municipal water system.
Balancing Account
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. As of December
31, 2003 and 2002, the balancing account had a net over-collected balance of
$7,000 and an under-collected balance of $262,000, respectively.
Stock-Based Compensation
SJW Corp. follows Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation", which established a fair value
based method of accounting for stock-based compensation plans. The Corporation
utilized the Black-Scholes option-pricing model to compute the fair value of
options at grant date as basis for the stock-based compensation for financial
reporting purposes.
34
SJW CORP. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002, and 2001 - (Continued)
(Dollars in thousands, except share data)
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. Diluted earnings per share and comprehensive income per share
are based upon the weighted average number of common shares including both
shares outstanding and shares potentially issued in connection with stock
options and restricted common stock units granted under SJW Corp.'s Long-Term
Incentive Plan, and income available to common shareholders and comprehensive
income, respectively, adjusted for recognized stock compensation expense.
On January 29, 2004, the Board of Directors of SJW Corp. approved a
three-for-one stock split of common stock. The three-for-one stock split is
effective on March 2, 2004. Basic and diluted earnings and comprehensive income
per share reflect the impact of this stock split.
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 18,000,000 shares of $1.042 par value
common stock. At December 31, 2003 and 2002, 9,135,441 shares of common stock
were issued and outstanding.
At December 31, 2003 and 2002, 176,407 shares of $25 par value preferred
stock were authorized. At December 31, 2003 and 2002, none were outstanding.
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 July 1, 2005. The
following table represents borrowings under this bank line of credit:
2003 2002 2001
------------ ---------- ----------
Maximum short-term borrowing ............ $ 13,950 11,500 26,100
Average amount outstanding .............. 6,251 7,219 12,650
Weighted average interest rate .......... 2.6% 3.1% 5.3%
Interest rate at December 31 ............ 3.0% 3.3% 3.8%
Balance as of December 31 ............... $ - 11,450 11,500
35
SJW CORP. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002, and 2001 - (Continued)
(Dollars in thousands, except share data)
Note 4. Long-Term Debt
Long-term debt as of December 31 was as follows:
Description Due Date 2003 2002
- -------------------------------------- ---------- ----------- ---------
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
G 5.93% ............................ 2033 20,000 -
--------- ------
Total senior notes ................. $ 130,000 110,000
--------- -------
Mortgage loan 5.96% ................ 2013 $ 9,798 -
--------- -------
Total debt ......................... $ 139,798 110,000
Less: Current portion .............. 184 -
--------- -------
Total long-term debt ............... $ 139,614 110,000
========= =======
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 senior note agreements of San Jose Water Company generally have terms
and conditions that restrict the company from issuing additional funded debt if
(1) the funded debt would exceed 66 2/3% of total capitalization, and (2) net
income available for interest charges for the trailing twelve calendar month
period would be less than 175% of interest charges.
The mortgage loans are the obligations of SJW Land Company, are due in
2013 and amortize over twenty-five years and are secured by two lease
properties; carry a fixed interest rate with 120 monthly principal and interest
payments. The loan agreement generally restricts the company from prepayment in
the first five years and requires submission of periodic financial reports as
part of the loan covenants. An amortization schedule of the mortgage loans is as
follows:
Amortization Schedule
-----------------------------------------
Year Total Payment Interest Principal
- ---------------------- --------------- ---------- ----------
2004 ............... $ 763 $ 579 $ 184
2005 ............... 763 568 195
2006 ............... 763 556 207
2007 ............... 763 543 220
2008 ............... 763 530 233
Thereafter ......... 10,917 8,761 2,156
The fair value of long-term debt as of December 31, 2003 and 2002 was
approximately $161,981 and $119,032, respectively, using a discounted cash flow
analysis, based on the current rates for similar financial instruments of the
same duration.
36
SJW CORP. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002, and 2001 - (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:
2003 2002 2001
---------- --------- ---------
"Expected" federal income tax ............................. $10,957 8,361 7,492
Increase (decrease) in taxes attributable to:
State taxes, net of federal income tax benefit .......... 1,799 1,373 1,229
Dividend received deduction ............................. (303) (302) (300)
Merger related expense deduction ........................ - - (937)
Other items, net ........................................ 176 226 (93)
------- ----- -----
$12,629 9,658 7,391
======= ===== =====
The components of income tax expense were:
2003 2002 2001
---------- ------- --------
Current:
Federal ............... $ 4,199 4,740 3,946
State ................. 2,374 1,986 1,274
Deferred:
Federal ............... 6,129 2,838 1,795
State ................. (73) 94 376
------- ----- -----
$12,629 9,658 7,391
======= ===== =====
2003 2002 2001
---------- ------- --------
Income taxes included in operating expense .......... $10,523 9,658 7,391
Income taxes included in gain on sale of nonutility
property .......................................... 2,106 - -
------- ----- -----
$12,629 9,658 7,391
======= ===== =====
37
SJW CORP. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002, and 2001 - (Continued)
(Dollars in thousands, except share data)
The components of the net deferred tax liability as of December 31 were as
follows:
2003 2002
---------- ---------
Deferred tax assets:
Advances and contributions ................... $14,291 14,121
Unamortized investment tax credit ............ 1,063 1,095
Pensions and postretirement benefits ......... 2,784 2,061
California franchise tax ..................... 628 524
Other ........................................ 575 567
------- ------
Total deferred tax assets ....................... $19,341 18,368
Deferred tax liabilities:
Utility plant ................................ $39,596 33,891
Investment ................................... 10,102 8,411
Deferred gain-property transfer .............. 3,537 -
Debt reacquisition costs ..................... 991 1,041
Other ........................................ 1,347 2,695
------- ------
Total deferred tax liabilities .................. 55,573 46,038
------- ------
Net deferred tax liabilities .................... $36,232 27,670
======= ======
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
Intangible assets consist of a concession fee 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, $288, and $289
for the years ended December 31, 2003, 2002, and 2001, respectively.
Amortization expense for 2004, 2005, 2006, 2007, and 2008 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 2003 2002
- ----------------------------------------- --------- ---------
Concession fees ....................... $6,800 $6,800
Other intangibles ..................... 1,040 1,040
------ ------
Intangible assets ..................... $7,840 $7,840
Less: Accumulated amortization
Concession fees ................ 1,700 1,428
Other intangibles .............. 283 267
------ ------
Net intangible assets ................. $5,857 $6,145
====== ======
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
38
SJW CORP. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002, and 2001 - (Continued)
(Dollars in thousands, except share data)
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 ($27,300) of water, from SCVWD in the contract year ending June
30, 2004.
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 Valley Transportation Agency (VTA) whereby SJW Land
Company has granted VTA an irrevocable right to possession and use of 1.23 acres
of the company's parking lot property for the development of a light rail
station. VTA has adopted a resolution authorizing a condemnation proceeding to
acquire the land and has deposited $3.7 million in an escrow account as fair
market compensation. SJW Land Company waived the right to challenge VTA's
possession and use in any subsequent eminent domain proceeding but reserved the
right to assert, and has disputed the fair market value placed on the land.
According to the terms of the Agreement, if a settlement is not reached within
three months of the execution of the Agreement, VTA can file an eminent domain
complaint to acquire title to the parking lot property. On April 11, 2003, VTA
filed the eminent domain lawsuit. As a part of the proceedings, VTA has
transferred funds from the escrow account into a court deposit account to secure
its ongoing right of possession for construction of the light rail station
pending final litigation. Compensation for the taking of property will be
determined by the court or by way of settlement between SJW Land Company and
VTA. This transaction will be recorded and it is expected to result in an
increase to net income when the compensation issue is settled or a final court
order is rendered.
SJW Corp. is also subject to ordinary routine litigation incidental to its
business. Other than as disclosed above, there are no other pending legal
proceedings to which the Corporation or any of its subsidiaries is a party or to
which any of its properties is the subject that are expected to have a material
effect on the Corporation's financial position, results of operations or
cashflows. The Corporation maintains a reserve for litigation and claims which
had a balance of $648 and $609 as of December 31, 2003 and 2002, respectively.
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 $169, $147, and $165 in 2003, 2002, and 2001
respectively.
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
39
SJW CORP. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002, and 2001 - (Continued)
(Dollars in thousands, except share data)
Service LLC engages in the sale and rental of water conditioning equipment. SJW
Corp. owns approximately 75% of the joint venture and has invested $75 and $287
in 2003 and 2002, respectively. The consolidated financial statements of SJW
Corp. at December 31, 2003 and 2002 include the operating results of Crystal
Choice Water Service LLC. Inter-company balances were eliminated. Minority
interest in the losses of Crystal Choice Water Service LLC of $55, $87, and
$121 was included in other losses in the Consolidated Statements of Income and
Comprehensive Income at December 31, 2003, 2002, and 2001, respectively.
Included in other noncurrent liabilities of SJW Corp.'s Balance Sheet is
minority interest of $157 and $187 at December 31, 2003 and 2002, respectively.
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.
The Pension Plan is administered by a Committee that is composed of an
equal number of company and Union representatives. Investment decisions have
been delegated by the Committee to an Investment Manager, presently U.S. Trust.
Investment guidelines provided to the Investment Manager require that at least
30% of plan assets be invested in bonds or cash. Furthermore, equities are to be
diversified by industry groups and selected to achieve preservation of capital
coupled with long-term growth through capital appreciation and income.
Additionally, Prudential Securities Inc. has been retained by the Committee as
an advisor to monitor the performance of the Investment Manager based on written
plan performance goals and criteria. Generally it is expected of the Investment
Manager that the performance of the Pension Plan Fund, computed on a total
annual rate of return basis, should meet or exceed specific performance
standards over a five-year period and/or full market cycle. These standards
include a specific rate of return, a return of four percent in excess of
inflation and performance better than a similarly balanced fund using Standard
and Poor 500 and Salomon Bros. Indexes. Satisfactory performance will also be
achieved if the total return compared to an appropriate balanced fund universe
is:
a. in rising markets: in the second quartile of the universe
b. declining markets: in the first quartile of the universe
c. full market cycle: in the first quartile of the universe
General restrictions have been placed on the Investment Manager. He may
not acquire any security subject to any restriction: write, or sell any put,
naked call or call option; acquire any security on margin; or otherwise utilize
borrowed funds for the acquisition of any security; sell any security not owned
by the Fund; acquire more than 10% of any class of securities or any single
issuer; generally, acquire a security of any single issuer whose cost exceeds 6%
of the fund value; securities of the San Jose Water Company; trade in
commodities; or acquire foreign stocks except those traded as American
depository receipts on a U.S. Stock Exchange.
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 $5,008, $4,583, and $5,399 as of
December 31, 2003, 2002, and 2001, respectively, and net periodic pension cost
of $583, $606, and $616 for 2003, 2002, and 2001, respectively.
40
SJW CORP. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002, and 2001 - (Continued)
(Dollars in thousands, except share data)
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 $708, $671, and $639, in 2003, 2002, and 2001, 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 calculated utilizing the following assumptions:
Pension Benefits Other Benefits
--------------------------------- -----------------------------------
2003 2002 2001 2003 2002 2001
--------- --------- --------- ---------- ---------- ---------
Weighted-Average
Assumptions as of December 31 % % % % % %
Discount rate .......................... 6.25 6.75 7.25 6.25 6.75 7.25
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.
---- ---- ---- ----- ----- ------
The company utilizes Moody's 'A' and 'Aa' rated bonds in industrial,
utility and financial sectors with outstanding amount of $1 million or more in
determining the discount rate for actuarial expense calculation purposes. Both
rates reflect the appropriate economic conditions at time of measurement.
Net periodic cost for the defined benefit plans and other postretirement
benefits was:
Pension Benefits Other Benefits
--------------------------------------- --------------------------------
2003 2002 2001 2003 2002 2001
----------- ----------- ----------- -------- -------- ----------
Components of Net Periodic Benefit Cost
Service cost ............................. $ 1,413 $ 1,148 926 $ 46 41 40
Interest cost ............................ 2,741 2,640 2,421 122 118 118
Expected return on assets ................ (2,191) (2,659) (2,940) (41) (40) (33)
Amortization of transition obligation .... 56 54 3 56 56 56
Amortization of prior service cost ....... 286 354 258 16 16 16
Recognized actuarial loss/(gain) ......... 412 57 (346) - - (6)
-------- -------- ------ ----- --- ---
Net periodic benefit cost ................ $ 2,717 1,594 322 $ 199 191 191
======== ======== ====== ===== === ===
41
SJW CORP. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002, and 2001 - (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
------------------------------------- ------------------------------------
2003 2002 2001 2003 2002 2001
------------- ----------- ----------- ------------ ----------- -----------
Change in Benefit Obligation
Benefit obligation at beginning of year ......... $ 41,466 37,021 36,385 $ 1,821 1,709 1,569
Service cost .................................... 1,413 1,148 926 46 41 40
Interest cost ................................... 2,741 2,640 2,421 122 118 118
Amendments ...................................... - 424 1,275 1,711 - -
Actuarial loss/(gain) ........................... 3,516 1,931 (2,019) 152 66 101
Benefits paid ................................... (1,857) (1,698) (1,967) (113) (113) (119)
--------- ------ ------ -------- ----- -----
Benefit obligation at end of year ............... $ 47,279 41,466 37,021 $ 3,739 1,821 1,709
========= ====== ====== ======== ===== =====
Change in Plan Assets
Fair value of assets at beginning of year;
Debt securities ............................... $ 8,653 9,488 9,873 - - -
31.1% 27.9% 26.4% - - -
Equity securities ............................. $ 16,461 23,682 25,979 - - -
59.1% 69.6% 69.4% - - -
Cash & Equivalents ............................ $ 2,718 840 1,570 $ 507 394 483
9.8% 2.5% 4.2% 100% 100% 100%
--------- ------ ------ -------- ----- -----
$ 27,832 34,010 37,422 $ 507 394 483
Actual return on plan assets .................... 4,344 (4,713) (1,766) - 7 18
Employer contributions .......................... 2,000 233 321 114 206 -
Benefits paid ................................... (1,843) (1,698) (1,967) (100) (100) (107)
--------- ------ ------ -------- ----- -----
$ 32,333 27,832 34,010 521 507 394
========= ====== ====== ======== ===== =====
Fair value of assets at end of year;
Debt securities ............................... $ 7,116 8,653 9,488 - - -
22.0% 31.1% 27.9% - - -
Equity securities ............................. $ 21,677 16,461 23,682 - - -
67.0% 59.1% 69.6% - - -
Cash & Equivalents ............................ $ 3,540 2,718 840 $ 521 507 394
11.0% 9.8% 2.5% 100% 100% 100%
--------- ------ ------ -------- ----- -----
Total ......................................... $ 32,333 27,832 34,010 $ 521 507 394
========= ====== ====== ======== ===== =====
Funded Status
Plan assets less benefit obligation ............. $ (15,047) (13,633) (3,010) $ (3,218) (1,313) (1,315)
Unrecognized transition obligation .............. 96 152 206 453 509 565
Unamortized prior service cost .................. 1,985 2,270 3,387 1,735 39 54
Unrecognized actuarial(gain) loss ............... 10,665 9,388 (1,045) 229 20 (94)
--------- ------- ------ -------- ------ ------
Accrued benefit cost ............................ $ (2,301) (1,823) (462) $ (801) (745) (790)
========= ======= ====== ======== ====== ======
In 2004, the company expects to make a contribution of $1,341 and $114 to
the pension plan and other post retirement benefit plan, respectively.
42
SJW CORP. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002, and 2001 - (Continued)
(Dollars in thousands, except share data)
Amounts recognized on the balance sheet consist of:
Pension Benefits Other Benefits
---------------------------------------- ----------------------------------
2003 2002 2001 2003 2002 2001
------------ ----------- ----------- ---------- --------- ---------
Accrued benefit costs .................... $ (2,301) (1,823) (462) $ (801) (745) (790)
Additional minimum liability ............. (4,874) (4,541) (2,580) - - -
Intangible asset ......................... 2,080 2,423 1,001 - - -
Accumulated other comprehensive loss ..... 2,794 2,118 1,579 - - -
-------- ------ ------ ------ ---- ----
Net amount recognized .................... $ (2,301) (1,823) (462) $ (801) (745) (790)
======== ====== ====== ====== ==== ====
In December 2003, federal legislation was passed reforming Medicare and
introducing the Medicare Part D prescription drug program. San Jose Water
Company has not yet determined the effects, if any, the new legislation will
have on its post retirement benefit plan or calculation that are required under
SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than
Pensions", as disclosed in this Note. The legislation may provide a special
subsidy to San Jose Water Company which may affect the actuarial assumptions
used in determining the utilization rates and medical cost trends. In addition,
the FASB may take further action that could affect the accounting treatment of
the legislation.
Note 12. Long-Term Incentive Plan and Stock-Based Compensation
On April 29, 2003, SJW Corp.'s shareholders executed and approved a
technical amendment to its Long-Term Incentive Plan (Incentive Plan), which was
originally adopted on April 18, 2002. Under the Incentive Plan, 900,000 common
shares have been reserved for issuance. The amendment to the Incentive Plan
includes allowing non-employee directors to receive awards, authorizing the plan
administrator to grant stock appreciation rights, and listing of the performance
criteria for performance shares. The amended plan allows SJW Corp. to provide
key employees, including officers, and non-employee directors, the opportunity
to acquire a meaningful equity interest in the Corporation. 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 300,000 common shares.
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, 2003, no
securities were issued pursuant to the equity awards made and 127,407 shares
will be issued upon the exercise of outstanding options and deferred restricted
stock. The remaining shares available for issuance under the Incentive Plan are
772,593. The total compensation cost charged to income under all plans was $492
for 2003. The total benefits, including non-employee directors converted
post-retirement benefits, recorded in shareholders' equity under all plans were
$1,018. No awards were granted under the Incentive Plan in 2002 and 2001.
Stock Options
Awards in the form of stock option agreements under the Incentive Plan
allow executives to purchase common shares at a specified price. Options are
granted at an exercise price that is not less than the per share market price on
the date of grant. The options vest at a 25% rate on their anniversary date over
their first four years and are exercisable over a ten-year period. At December
31, 2003, 28,929 options were issued and outstanding under the Incentive Plan at
an exercise price of $28.00, with a weighted average remaining life of 9.3
years, and the weighted average fair value of $5.33, at the date of grant.
SJW Corp. has adopted Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation", utilizing the Black-Scholes
option-pricing model to compute the fair value of options at the grant date as a
basis for determining stock-based compensation costs for financial reporting
purposes. The assumptions utilized include: expected dividend yield - 3.4%,
expected volatility - 27%, risk-free interest rate - 2.86%, expected holding
period - five years.
43
SJW CORP. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002, and 2001 - (Continued)
(Dollars in thousands, except share data)
For the year ended December 31, 2003, the Corporation has recognized stock
compensation expense of $26, for the 28,929 options granted to its executives.
No options were granted in 2002 and 2001.
Stock Options
2003
-------------------------------
Weighted-Average
Shares Exercise Price
----------- -----------------
Outstanding at beginning of year .................... - -
Granted ............................................. 28,929 $ 28.00
Exercised ........................................... - -
Forfeited ........................................... - -
Outstanding at end of year .......................... 28,929 $ 28.00
Options exercisable at year-end ..................... - -
Weighted-average fair value of options granted during
the year ........................................... $ 5.33 -
Options Exercisable
Options Outstanding Options Exercisable
- --------------------------------------------------------- -------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Outstanding Life Exercise Exercisable Exercise
Prices at 12/31/03 (years) Price at 12/31/03 Price
- ------------ ------------- ------------- ---------- ------------- ---------
$ 28.00 28,929 9.3 $ 28.00 - -
Deferred Restricted Stock Plans
As of December 31, 2003, 41,670 restricted stock units have been granted
to a key employee of the Corporation, which vest over a period of three years
and are payable upon retirement. Following SFAS No. 123, the restricted stock
units were valued at the market price of $28.10 per share at the date of grant,
which is being recognized as compensation expense over the vesting period. For
the year ended December 31, 2003, the Corporation has recognized stock
compensation expense of $234 related to these restricted stock units. SJW Corp.
has a Deferred Restricted Stock Program for non-employee Board members whereby
members can elect to receive their existing and future cash pension benefit, and
annual retainer fees in restricted stock units under the program.
Directors who elect to participate in the program will receive an annual
grant of the right to receive Deferred Restricted Stock in lieu of receiving a
cash pension benefit, an amount equivalent to the annual retainer fee, upon
retirement. The number of shares of each annual Deferred Restricted Stock award
will equal to the amount of the aggregate annual retainer, as of the date of
grant, divided by the fair market value of one share of the Corporation's common
stock on the date of grant. Directors can receive a maximum number of ten awards
for ten full years of service. With respect to the conversion of existing
pension benefits that were accrued before the grant date, 20,487 shares were
fully vested at the time of grant and the remaining 35,037 shares vest over a
period of three years. As of December 31, 2003, 55,524 shares have been granted
to the directors under the program at a market price of $28.40 per share. In
accordance with SFAS No. 123, the Corporation has recognized stock compensation
expense of $141 for the year ended December 31, 2003.
Directors who elect to convert the annual retainer fee receive Deferred
Restricted Stock in an amount equal to the annual retainer fee divided by the
fair market value of one share of common stock
44
SJW CORP. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002, and 2001 - (Continued)
(Dollars in thousands, except share data)
on the last business day before the date of grant, which will vest on a monthly
basis. For the year ended December 31, 2003 the Corporation has granted 428
deferred restricted shares in lieu of cash retainer fees at $28.07 and
recognized stock compensation expense of $36. No Deferred Restricted Stock was
granted in 2002 and 2001.
Deferred Restricted Shares Outstanding
Weighted
Average Issue
Price Shares
-------------- ---------
Outstanding at 12/31/2002 ......... - -
Issued ..................... $ 28.27 98,478
Forfeited .................. - -
Outstanding at 12/31/2003 ......... $ 28.27 98,478
Shares vested ..................... - 35,661
Dividend Equivalent Rights
SJW Corp. also has a Dividend Equivalent Rights Agreement providing
holders of options to receive dividend rights each time a dividend is paid on
common shares after the option grant date, for a maximum period of four years.
Dividend Equivalent Rights for restricted stock units allow holders of
restricted stock units to receive dividend rights, each time a dividend is paid
on common shares after the grant date, until the stock is issued to the holder.
The accumulated dividends of the holders will be used to purchase stock units on
behalf of the holders at the beginning of the following year using the average
fair market value of common shares on each of the dividend dates in the
immediately preceding year. The dividend equivalent units shall be vested in the
same manner as the options and restricted stock. For the year ended December 31,
2003, the Corporation has recognized compensation expense for dividend rights of
$55.
Note 13. Sale of Nonutility Property
On March 11, 2003, SJW Corp. sold San Tomas station, a nonutility
property, to Santa Clara Valley Water District (SCVWD) for a contract price of
$5,400. SJW Corp. recognized a gain on sale of nonutility property of $3,030,
net of tax of $2,106 in connection with the sale. In April 2003, the Corporation
reinvested the property sale proceeds by acquiring two income properties in the
states of Connecticut and Florida, at a total purchase price of $15,400. In
connection with the purchases, the Corporation executed mortgages in the amount
of $9,900. The mortgage loans are due in ten years with a fixed interest rate of
5.96%. The mortgages are secured by the same properties that SJW Corp. has
purchased in the states of Connecticut and Florida.
Note 14. Subsequent events
On January 29, 2004, SJW Corp.'s Board of Directors approved a
three-for-one stock split of common stock for shareholders of record on February
10, 2004 and the issued shares were split on a three-for-one basis on March 1,
2004. Share and per share computations provided herein reflect the changes in
the number of shares due to the stock split.
45
SJW CORP. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002, and 2001 - (Continued)
(Dollars in thousands, except share data)
Note 15. Unaudited Quarterly Financial Data
Summarized quarterly financial data is as follows:
2003 Quarter ended
---------------------------------------------------
March June September December
------------ ---------- ----------- ---------
Operating revenue ............ $ 27,791 37,968 49,334 34,639
Operating income ............. 3,976 6,256 7,887 4,835
Net income ................... 5,282 4,426 5,967 3,002
Comprehensive income ......... 6,645 5,964 4,468 3,635
Earnings per share
- Basic ................... 0.58 0.48 0.65 0.33
- Diluted ................. 0.58 0.48 0.65 0.33
Comprehensive income per share
- Basic ................... 0.73 0.65 0.49 0.40
- Diluted ................. 0.72 0.65 0.49 0.40
Market price range of stock:
High ...................... 28.08 29.15 29.42 29.90
Low ....................... 25.13 25.65 27.25 28.47
Dividends per share .......... 0.25 0.24 0.24 0.24
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
Earnings per share
- Basic ................... 0.19 0.44 0.63 0.30
- Diluted ................. 0.19 0.44 0.63 0.30
Comprehensive income per share
- Basic ................... 0.18 0.41 0.66 0.13
- Diluted ................. 0.18 0.41 0.66 0.13
Market price range of stock:
High ...................... 29.67 29.40 27.13 27.95
Low ....................... 26.08 25.68 25.67 25.93
Dividends per share .......... 0.23 0.23 0.23 0.23
46
SJW CORP.
FINANCIAL STATEMENT SCHEDULE
Schedule II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years ended December 31, 2003 and 2002
Description 2003 2002
- ----------------------------------------------- ------------- -------------
Allowance for doubtful accounts
Balance, beginning of period ............... $ 120,000 100,000
Charged to expense ......................... 307,628 397,860
Accounts written off ....................... (344,231) (405,030)
Recoveries of accounts written off ......... 46,603 27,170
---------- --------
Balance, end of period ..................... $ 130,000 120,000
========== ========
Reserve for litigation and claims
Balance, beginning of period ............... $ 609,292 579,698
Charged to expense ......................... 105,000 90,000
Payments ................................... (66,067) (60,406)
---------- --------
Balance, end of period ..................... $ 648,225 609,292
========== ========
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) The Corporation's management, with the participation of the
Corporation's Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the Corporation's disclosure controls and procedures as of the
end of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Corporation's
disclosure controls and procedures (as defined in Rules 13(a)-14(c) and
15d-14(c) under the Securities Exchange Act of 1934) as of the end of the period
covered by this report have been designed and are functioning effectively to
provide reasonable assurance that the information required to be disclosed by
the Corporation in reports filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. The Corporation
believes that a control system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the control system are met,
and no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been detected.
(b) Changes in internal controls. There has been no change in internal
control over financial reporting during the fourth fiscal quarter that has
materially affected, or is reasonably likely to materially affect the internal
controls over financial reporting of SJW Corp.
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 2004 Annual
Meeting of Shareholders to be held on April 29, 2004 (the "2004 Proxy
Statement") under the captions "Proposal 1 - Election of Directors", "Section
16(a) Beneficial Ownership Reporting Compliance," and "Corporate Governance and
Board Matters" and is incorporated herein by reference.
47
Code of Ethics
SJW Corp. has adopted a code of ethics that applies to SJW Corp.'s Chief
Executive Officer, Chief Financial Officer and Chief Accounting Officer. The
text of the code of ethics is posted on SJW Corp.'s internet website under web
address http://www.sjwater.com. SJW Corp. intends to satisfy the disclosure
requirements under Item 10 of Form 8-K regarding an amendment to, or a waiver
from, a provision of its code of ethics by posting such information on its
website.
Item 11. Executive Compensation
The information required by this item is contained in the 2004 Proxy
Statement under the captions "Compensation of Directors," "Executive
Compensation," "Employment 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 2004 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 2004 Proxy
Statement under the caption "Certain Relationships and Related Transactions,"
and is incorporated herein by reference.
PART IV
Item 14. Prinicipal Accountant Fees and Services
The information required by this item is contained in the 2004 Proxy
Statement under the caption "Principal Accountant Fees and Services" and is
incorporated herein by reference.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(1) Financial Statements
Page
-----
Independent Auditors' Report ..................................................... 27
Consolidated Balance Sheets as of December 31, 2003 and 2002 ..................... 28
Consolidated Statements of Income and Comprehensive Income for the years ended
December 31, 2003, 2002, and 2001 ............................................... 29
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 2003, 2002, and 2001 ............................................... 30
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002,
and 2001 ........................................................................ 31
Notes to Consolidated Financial Statements ....................................... 32
(2) Financial Statement Schedule
Schedule
Number II
- ---------
Valuation and Qualifying Accounts and Reserves,
Years ended December 31, 2003 and 2002 ........................................... 47
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial statements or
related notes.
48
(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. SJW Corp. filed a current report on Form 8-K
with the Securities and Exchange Commission on October 29, 2003 to furnish
its press release that announced the financial results for the third
quarter ended September 30, 2003 under Item 12 thereof.
49
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.(1)
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.
10.3 San Jose Water Company Executive Supplemental Retirement Plan adopted by San
Jose Water Company Board of Directors.(2)
10.4 First Amendment to San Jose Water Company Executive Supplemental Retirement
Plan adopted by San Jose Water Company Board of Directors.(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)
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 Form 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 Form
10-Q for the period ending September 30, 1999. S.E.C. File No. 1-8966.(2)
50
Exhibit
No. Description
- ---------- -------------------------------------------------------------------------------------
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 Form 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
Form 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 Form 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 Form 10-Q for the period ending September 30, 1999. S.E.C.
File No. 1-8966.
10.18 San Jose Water Company Executive Supplemental Retirement Plan adopted by San
Jose Water Company Board of Directors, as restated to reflect amendments made
through May 1, 2003. Filed as an Exhibit to Form 10-Q for the period ended June
30, 2003. S.E.C. File No. 1-8966.(2)
10.19 SJW Corp. Executive Severance Plan adopted by SJW Corp. Board of Directors, as
restated to reflect amendments made through May 1, 2003. Filed as an Exhibit to
Form 10-Q for the period ended June 30, 2003. S.E.C. File No. 1-8966.(2)
10.20 SJW Corp. Long-Term Incentive Plan, adopted by SJW Corp. Board of Directors,
as amended on March 3, 2003. Filed as an Exhibit to Form 10-Q for the period
ended June 30, 2003. S.E.C. File No. 1-8966.(2)
10.21 Chief Executive Officer Employment Agreement, as restated on June 27, 2003.
Filed as an Exhibit to Form 10-Q for the period ended June 30, 2003. S.E.C. File
No. 1-8966.(2)
10.22 Standard Form of Stock Option Agreement-subject to changes per Employment
Agreement, as adopted by the SJW Corp. Board of Directors on April 29, 2003.
Filed as an Exhibit to Form 10-Q for the period ended June 30, 2003. S.E.C. File
No. 1-8966.(2)
10.23 Chief Executive Officer SERP Deferred Restricted Stock Award, as restated on
June 27, 2003. Filed as an Exhibit to Form 10-Q for the period ended June 30,
2003. S.E.C. File No. 1-8966.(2)
10.24 Form of Stock Option Agreement with Dividend Equivalent Agreement as
adopted by the Board of Directors on April 29, 2003. Filed as an Exhibit to Form
10-Q for the period ended June 30, 2003. S.E.C. File No. 1-8966.(2)
10.25 Form of Directors Deferred Restricted Stock Program as adopted by SJW Corp.
Board of Directors on July 29, 2003. Filed as an Exhibit to Form 10-Q for the
period ending September 30, 2003. S.E.C. File No. 1-8966.(2)
10.26 Form of Directors Annual Retainer Fee Deferred Election Agreement, as adopted
by SJW Corp. Board of Directors on July 29, 2003. Filed as an Exhibit to Form
10-Q for the period ending September 30, 2003. S.E.C. File No. 1-8966.(2)
51
Exhibit
No. Description
- -------- --------------------------------------------------------------------------------------
31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a) by President and Chief
Executive Officer.(1)
31.2 Certification Pursuant to Rule 13a-14(a)/15d-14(a) by Chief Financial Officer and
Treasurer.(1)
32.1 Certification Pursuant to 18 U.S.C. Section 1350 by President and Chief Executive
Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)
32.2 Certification Pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer and
Treasurer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)
- ------------
(1) Filed currently herewith.
(2) Management contract or compensatory plan or agreement.
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.
52
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, 2004 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, 2004 By /s/ W. RICHARD ROTH
----------------------------------
W. Richard Roth,
President, Chief Executive Officer
and Member, Board of Directors
Date: January 29, 2004 By /s/ ANGELA YIP
----------------------------------
Angela Yip,
Chief Financial Officer
Date: January 29, 2004 By /s/ VICTOR K. WONG
----------------------------------
Victor K. Wong,
Controller (Chief Accounting Officer)
Date: January 29, 2004 By /s/ MARK L. CALI
----------------------------------
Mark L. Cali,
Member, Board of Directors
Date: January 29, 2004 By /s/ J. PHILIP DINAPOLI
----------------------------------
J. Philip Dinapoli,
Member, Board of Directors
Date: January 29, 2004 By /s/ DREW GIBSON
----------------------------------
Drew Gibson,
Member, Board of Directors
Date: January 29, 2004 By /s/ RONALD R. JAMES
----------------------------------
Ronald R. James,
Member, Board of Directors
Date: January 29, 2004 By /s/ GEORGE E. MOSS
----------------------------------
George E. Moss,
Member, Board of Directors
53
Date: January 29, 2004 By /s/ ROSCOE MOSS, JR.
----------------------------------
Roscoe Moss, JR.,
Member, Board of Directors
Date: January 29, 2004 By /s/ CHARLES J.TOENISKOETTER
----------------------------------
Charles J. Toeniskoetter,
Member, Board of Directors
Date: January 29, 2004 By /s/ FREDERICK ULRICH
----------------------------------
Frederick Ulrich,
Member, Board of Directors
54