SJW Corp.’s contractual obligation and commitments as of December 31, 2004 are as follows:
In addition to the obligations listed above, San Jose Water Company issued a standby letter of credit with a commercial bank in the amount of $2,000,000 in support of its $2,500,000 Safe Drinking Water Act State Revolving Fund Loan which will be funded in 2005. The letter of credit will be renewed annually in December and the amount of coverage can be reduced as the principal balance decreases. As of December 31, 2004, the loan has not been funded.
San Jose Water Company purchases water from the SCVWD under terms of a master contract expiring in 2051. Delivery schedules for purchased water are based on a contract year beginning July 1, and are negotiated every three years under terms of a master contract with SCVWD expiring in 2051. For the years ending December 31, 2004, 2003 and 2002, San Jose Water Company purchased from SCVWD 21,500 million gallons ($31,500,000), 20,700 million gallons ($28,100,000) and 21,900 million gallons ($27,900,000), respectively, of contract water. Based on current prices and estimated deliveries, San Jose Water Company expects to purchase a minimum of 90% of the delivery schedule, or 19,800 million gallons ($30,100,000) of water at the current contract water rate of $1,519 per million gallons, from SCVWD in the contract year ending June 30, 2005. Additionally, San Jose Water Company purchases non-contract water from SCVWD on an “as needed” basis and if the water supply is available from SCVWD. The contract water rates are determined by the SCVWD. These rates are adjusted periodically and coincide with SCVWD’s fiscal year, which ends annually on June 30. The contract water rates for SCVWD’s fiscal year ended 2005, 2004, and 2003 were $1,519, $1,412 and $1,289 per million gallons, respectively.
San Jose Water Company sponsors noncontributory defined benefit pension plan and provides health care and life insurance benefits for retired employees. In 2005, the company expects to make a contribution of $2,264,000 and $297,000 to the pension plan and the postretirement benefit plan, respectively. The amount of required contributions for years thereafter is not actuarially determinable.
San Jose Water Company’s other benefit obligations include employees’ and directors’ postretirement contracts and a supplemental executive retirement plan. Under these benefit plans, the company is committed to pay approximately $312,000 annually to former officers and directors. Future payments may fluctuate depending on the life span of the retirees and as current officers and executives retire.
SJW Land Company owns a 70% limited partnership interest in 444 West Santa Clara Street, L.P., a real estate limited partnership. The general partner, which is controlled and 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 property of 444 West Santa Clara Street, L.P. and is leased to an international real estate firm under a 12-year lease. The partnership is being accounted for under FIN46R.
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). 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. As required by law, San Jose Water Company files general rate applications with the CPUC on a periodic basis.
On May 23, 2003, San Jose Water Company filed a General Rate Case application with the CPUC seeking authority to increase rates for 2004, 2005 and 2006 to recover the 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. Since the CPUC was unable to finalize a decision on this request, pursuant to Public Utility Code Section 455.2 (PU Code 455.2), San Jose Water Company filed for and received a 2% interim rate increase effective January 1, 2004. On September 30, 2002, the interim rate relief bill (AB 2838) was signed into law and codified as PU Code 455.2, effective January 1, 2003. This section 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 shall be based on a water company’s existing rates increased for the amount of inflation since the last approved rate adjustment. This section also allows for revenue reconciliation from the time of the implementation of the interim rates to the time of the CPUC’s ultimate decision in the general rate case. In principal, this mechanism is designed to eliminate the adverse financial impact on water utilities caused by regulatory delays in general rate cases.
On August 19, 2004, the CPUC issued its final decision in San Jose Water Company’s 2003 General Rate Case application with the new rates effective August 24, 2004. San Jose Water Company was authorized rate increases of $11,800,000, or 8% in 2004, $4,300,000, or 2.7% in 2005, and $4,200,000, or 2.6% in 2006. The CPUC decision authorized a return on common equity in 2004, 2005 and 2006 of 9.90%, which is within the range of recent rates of return authorized by the CPUC for water utilities. San Jose Water Company was also authorized 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.
Although San Jose Water Company believes that the rates currently in effect provide it with a reasonable rate of return, there is no guarantee such rates will be sufficient to provide a reasonable rate of return in the future. There is no guarantee that the company’s future rate filings will be able to obtain a satisfactory rate of return in a timely manner.
In addition, San Jose Water Company relies on policies and regulations promulgated by the CPUC in order to, for example, recover capital expenditures, maintain favorable treatment on gains from the sale of real property, offset its production and operating costs, recover the cost of debt, maintain an optimal equity structure without over-leveraging, and have financial and operational flexibility to engage in non-regulated operations. If the CPUC implements policies and regulations that do not allow San Jose Water Company to accomplish some or all of the items listed above, San Jose Water Company’s 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 (the 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 was authorized rate recovery of the under-collection of $382,000 accrued in its pre-November 29, 2001 balancing account in its August 19, 2004 rate decision.
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 test to evaluate earnings for all years.
22
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, 2004, the balancing account accumulated an under-collection of $611,000.
As of December 31, 2004, 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 can not be determined until San Jose Water Company’s next offset rate increase request, which is anticipated for July, 2005.
| | 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 affect 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 by the CPUC to recover the additional or increased water supply costs, its operating results may be adversely affected.
The SCVWD receives an allotment of water from state and federal water projects. If San Jose Water Company has difficulties obtaining a high quality water supply from the SCVWD due to availability or 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 require a significant amount of energy, increases in energy prices could increase operating expenses of San Jose Water Company. 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.
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 consumed at the lowest rates. 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. An increase in demand or a reduction in the availability of surface water or import water could result in the need to pump more water during peak hours adversely affecting the operating results of San Jose Water Company.
| | 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 subsequent quarters. 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 and construction codes, which require the use of low-flow plumbing fixtures, could diminish water consumption and result in reduced revenue.
23
| | 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, such lawsuits against other water utilities have increased in frequency in recent years. If San Jose Water Company is subject to an environmental or product-related lawsuit, it might incur significant legal costs and it is uncertain whether it would be able to recover the legal costs from ratepayers or other third parties. In addition, if current California law regarding CPUC’s preemptive jurisdiction over regulated public utilities for claims about compliance with California Department of Health Services (CDHS) and United States 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 CDHS 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 CDHS 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
24
improvements were incorporated into the capital budgets to be completed by 2005. For the years ended December 31, 2004 and 2003, $643,000 and $540,000, respectively, were 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 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 all or part of such costs, and as a result, the company’s operating results and business may be adversely affected.
| | Other factors that affect operating results. |
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. |
| • | | If recycled water is widely accepted as a substitute to potable water and if rights are granted to others to serve San Jose Water Company’s customers recycled water, San Jose Water Company’s sales, revenue and operating results would be negatively impacted. |
| • | | 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. The San Jose Sharks, a professional hockey team, performs at the HP Pavilion. As a result of the cancellation of the 2004-2005 hockey season by the National Hockey League, SJW Land Company’s parking lot revenue will be negatively impacted. |
Internal Controls
Section 404 of the Sarbanes-Oxley Act of 2002 requires that SJW Corp. evaluates and reports on its system of internal controls. In addition, the independent auditors must report on management’s evaluation of those controls. SJW Corp. has documented and tested its system of internal controls to provide the basis for its report. If SJW Corp.’s evaluation of internal controls and the independent auditors evaluation are unable to provide SJW Corp. with an unqualified report as to the effectiveness of its internal controls over financial reporting for future year-ends, investors could lose confidence in the reliability of SJW Corp.’s financial statements, which could result in a decrease in the intrinsic value of SJW Corp.
Impact of Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46(R), “Consolidation of Variable Interest Entities”, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. In December 2003, FIN46R was issued to replace FASB Interpretation No. 46. For any variable interest entities (VIE or VIEs) required to be consolidated under FIN46R that were created before January 1, 2004, the assets, liabilities and non-controlling interests of the VIE initially were measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest recognized in the cumulative effect of an accounting change. If determining the carrying amounts was not practicable, fair value at the date FIN46R first applies could be used to measure the assets, liabilities and non-controlling interest of the VIE. The adoption of FIN46R has resulted in the consolidation of the Corporation’s 70% limited partnership interest in 444 West Santa Clara Street, L.P. as of January 1, 2004, which had previously been accounted for under the equity method of accounting. As described in Note 9, “Partnership Interest Restatement”, in the Notes to the Consolidated Financial Statements, the financial statements for 2003 and 2002 have been restated to reflect this change.
In December 2004, the Financial Accounting Standards Board issued a revised Statement No. 123, Share-Based Payment (Statement 123(R)), which addresses the accounting for share-based payment transactions in which an enterprise received employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity
25
instruments. Statement 123(R) requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to employees in the income statement. The Statement 123(R) generally requires that an entity account for those transactions using the fair-value-based method, and eliminates an entity’s ability to account for the share-based compensation transactions using the intrinsic value method of accounting in APB Opinion No. 25, Accounting for Stock Issued to Employees, which was permitted under Statement 123, as originally issued. Statement 123(R) is effective for public companies that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. SJW Corp. is utilizing a fair value option pricing model in calculating its options expense, which is an acceptable method under Statement 123(R), therefore, the adoption of Statement 123(R) is not expected to have a material impact on the Corporation’s financial position, results of operations or cash flows.
In December 2004, the Financial Accounting Standards Board issued FASB Statement No. 153 (Statement 153), Exchanges of Productive Assets: an Amendment of Opinion No. 29. As part of its short-term international convergence project with the IASB, on December 16, 2004, the FASB issued Statement 153 to address the accounting for nonmonetary exchanges of productive assets. Statement 153 amends APB No. 29, Accounting for Nonmonetary Exchanges, which established a narrow exception for nonmonetary exchanges of similar productive assets from fair value measurement. Statement 153 eliminates that exception and replaces it with an exception for exchanges that do not have commercial substance. Under Statement 153, nonmonetary exchanges are required to be accounted for at fair value, recognizing any gains or losses, if the fair value is determinable within reasonable limits and the transaction has commercial substance. Statement 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. An entity should apply the provisions of Statement 153 prospectively for nonmonetary asset exchange transactions in fiscal periods beginning after June 15, 2005. The adoption of Statement 153 is not expected to have a material impact on the Corporation’s financial position, results of operations or cash flows.
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. Future financing is subject to the exposure to changes in interest rates. 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
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, 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, 2004. 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 based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. 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.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the internal control over financial reporting of SJW Corp. and subsidiaries as of December 31, 2004, based on the criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
KPMG LLP
Mountain View, California
February 28, 2005
27
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Shareholders and Board of Directors
SJW Corp.:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, that SJW Corp. maintained effective internal control over financial reporting as of December 31, 2004, based on the criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management of SJW Corp. is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the internal control over financial reporting of SJW Corp. based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that SJW Corp. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established inInternal Control — Integrated Framework issued by the COSO. Also, in our opinion, SJW Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established inInternal Control — Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of SJW Corp. and subsidiaries as of December 31, 2004 and 2003, 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, 2004, and our report dated February 28, 2005 expressed an unqualified opinion on those consolidated financial statements.
KPMG LLP
Mountain View, California
February 28, 2005
28
SJW CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| | | | December 31
| |
|---|
| | | | 2004
| | 2003
(Restated,
see Note 9)
|
|---|
Assets
| | | | | | | | | | |
| Utility plant:
| | | | | | | | | | |
| Land | | | | $ | 1,735 | | | | 1,750 | |
| Depreciable plant and equipment | | | | | 605,420 | | | | 570,119 | |
| Construction in progress | | | | | 4,595 | | | | 4,000 | |
| Intangible assets | | | | | 7,840 | | | | 7,840 | |
| | | | | | 619,590 | | | | 583,709 | |
| Less accumulated depreciation and amortization | | | | | 189,221 | | | | 174,985 | |
| | | | | | 430,369 | | | | 408,724 | |
| Nonutility property | | | | | 35,154 | | | | 34,918 | |
| Less accumulated depreciation and amortization | | | | | 3,167 | | | | 2,349 | |
| | | | | | 31,987 | | | | 32,569 | |
Current assets:
| | | | | | | | | | |
| Cash and equivalents | | | | | 10,899 | | | | 10,278 | |
Accounts receivable:
| | | | | | | | | | |
| Customers, net of allowances for uncollectible accounts | | | | | 8,044 | | | | 7,506 | |
| Other | | | | | 611 | | | | 1,332 | |
| Accrued unbilled utility revenue | | | | | 6,605 | | | | 6,205 | |
| Materials and supplies | | | | | 559 | | | | 485 | |
| Prepaid expenses | | | | | 1,652 | | | | 1,534 | |
| | | | | | 28,370 | | | | 27,340 | |
Other assets:
| | | | | | | | | | |
| Investment in California Water Service Group | | | | | 41,413 | | | | 30,139 | |
| Unamortized debt issuance and reacquisition costs | | | | | 3,300 | | | | 3,447 | |
| Regulatory assets | | | | | 8,064 | | | | 7,976 | |
| Intangible pension asset | | | | | 4,357 | | | | 2,081 | |
| Other | | | | | 4,292 | | | | 3,968 | |
| | | | | | 61,426 | | | | 47,611 | |
| | | | | $ | 552,152 | | | | 516,244 | |
(continued)
See accompanying notes to consolidated financial statements
29
SJW CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| | | | December 31
| |
|---|
| | | | 2004
| | 2003
(Restated,
see Note 9)
|
|---|
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 | | | | | 14,306 | | | | 13,375 | |
| Retained earnings | | | | | 148,525 | | | | 138,058 | |
| Accumulated other comprehensive income | | | | | 12,344 | | | | 5,419 | |
| Total shareholders’ equity | | | | | 184,691 | | | | 166,368 | |
| Long-term debt, less current portion | | | | | 143,604 | | | | 143,879 | |
| | | | | | 328,295 | | | | 310,247 | |
Current liabilities:
| | | | | | | | | | |
| Current portion of long-term debt | | | | | 275 | | | | 252 | |
| Accrued pump taxes and purchased water | | | | | 3,856 | | | | 3,224 | |
| Purchased power | | | | | 848 | | | | 864 | �� |
| Accounts payable | | | | | 870 | | | | 2,217 | |
| Accrued interest | | | | | 3,619 | | | | 3,619 | |
| Accrued taxes | | | | | 890 | | | | 467 | |
| Accrued payroll | | | | | 1,066 | | | | 759 | |
| Work order deposit | | | | | 773 | | | | 1,511 | |
| Other current liabilities | | | | | 3,154 | | | | 2,231 | |
| | | | | | 15,351 | | | | 15,144 | |
Deferred income taxes | | | | | 49,507 | | | | 36,714 | |
Unamortized investment tax credits | | | | | 1,915 | | | | 1,975 | |
Advances for construction | | | | | 65,251 | | | | 79,311 | |
Contributions in aid of construction | | | | | 78,655 | | | | 61,811 | |
Deferred revenue | | | | | 1,282 | | | | 1,328 | |
Postretirement benefit plans | | | | | 9,359 | | | | 6,856 | |
Other noncurrent liabilities | | | | | 2,537 | | | | 2,858 | |
Commitments and contingencies | | | | $ | 552,152 | | | | 516,244 | |
See accompanying notes to consolidated financial statements
30
SJW CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31
(in thousands, except share and per share data)
| | | | 2004
| | 2003
(Restated,
see Note 9)
| | 2002
(Restated,
see Note 9)
|
|---|
Operating revenue | | | | $ | 166,911 | | | | 150,454 | | | | 146,373 | |
Operating expense:
| | | | | | | | | | | | | | |
Operation:
| | | | | | | | | | | | | | |
| Purchased water | | | | | 41,220 | | | | 36,708 | | | | 38,228 | |
| Power | | | | | 5,511 | | | | 5,296 | | | | 6,805 | |
| Pump taxes | | | | | 21,773 | | | | 17,931 | | | | 18,950 | |
| Administrative and general | | | | | 17,285 | | | | 16,202 | | | | 13,466 | |
| Other | | | | | 12,892 | | | | 12,585 | | | | 12,225 | |
| Maintenance | | | | | 8,674 | | | | 7,724 | | | | 7,866 | |
| Property taxes and other nonincome taxes | | | | | 5,314 | | | | 5,065 | | | | 4,420 | |
| Depreciation and amortization | | | | | 18,481 | | | | 15,225 | | | | 14,013 | |
| Income taxes | | | | | 11,644 | | | | 10,523 | | | | 9,658 | |
Total operating expense | | | | | 142,794 | | | | 127,259 | | | | 125,631 | |
| Operating income | | | | | 24,117 | | | | 23,195 | | | | 20,742 | |
| Other (expense) income:
| | | | | | | | | | | | | | |
| Interest on senior notes | | | | | (9,247 | ) | | | (8,471 | ) | | | (7,803 | ) |
| Mortgage and other interest expense | | | | | (923 | ) | | | (530 | ) | | | (218 | ) |
| Condemnation gain, net of taxes of $2,624 | | | | | 3,776 | | | | — | | | | — | |
| Gain on sale of nonutility property, net of taxes of $2,106 | | | | | — | | | | 3,030 | | | | — | |
| Dividends | | | | | 1,243 | | | | 1,237 | | | | 1,232 | |
| Other, net | | | | | 820 | | | | 216 | | | | 279 | |
Net income | | | | $ | 19,786 | | | | 18,677 | | | | 14,232 | |
Other comprehensive income (loss):
| | | | | | | | | | | | | | |
| Unrealized income (loss) on investment, net of taxes of $4,622 in 2004, $1,691 in 2003, and ($947) in 2002 | | | | | 6,652 | | | | 2,434 | | | | (1,363 | ) |
| Minimum pension liability adjustment, net of taxes of $188 in 2004, $276 in 2003, and $220 in 2002 | | | | | 273 | | | | (399 | ) | | | (319 | ) |
| Other comprehensive income (loss) | | | | | 6,925 | | | | 2,035 | | | | (1,682 | ) |
Comprehensive income | | | | $ | 26,711 | | | | 20,712 | | | | 12,550 | |
Earnings per share
| | | | | | | | | | | | | | |
| Basic | | | | $ | 2.17 | | | | 2.04 | | | | 1.56 | |
| Diluted | | | | $ | 2.15 | | | | 2.04 | | | | 1.56 | |
Comprehensive income per share
| | | | | | | | | | | | | | |
| Basic | | | | $ | 2.92 | | | | 2.27 | | | | 1.37 | |
| Diluted | | | | $ | 2.90 | | | | 2.26 | | | | 1.37 | |
Weighted average shares outstanding
| | | | | | | | | | | | | | |
| Basic | | | | | 9,136,599 | | | | 9,135,441 | | | | 9,135,441 | |
| Diluted | | | | | 9,197,421 | | | | 9,148,476 | | | | 9,135,441 | |
See accompanying notes to consolidated financial statements
31
SJW CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands, except per share amounts)
| | | | Common
Stock
| | Additional
Paid-in
Capital
| | Retained
Earnings
| | Accumulated
Other
Comprehensive
Income
| | Total
Shareholders’
Equity
|
|---|
Balances, December 31, 2001 | | | | $ | 9,516 | | | | 12,357 | | | | 122,415 | | | | 5,066 | | | | 149,354 | |
| Net income | | | | | — | | | | — | | | | 14,232 | | | | — | | | | 14,232 | |
Other comprehensive income
| | | | | | | | | | | | | | | | | | | | | | |
| 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 ($0.92 per share) | | | | | — | | | | — | | | | (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 income
| | | | | | | | | | | | | | | | | | | | | | |
| 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 ($0.97 per share) | | | | | — | | | | — | | | | (8,861 | ) | | | — | | | | (8,861 | ) |
Balances, December 31, 2003 | | | | $ | 9,516 | | | | 13,375 | | | | 138,058 | | | | 5,419 | | | | 166,368 | |
| Net income | | | | | — | | | | — | | | | 19,786 | | | | — | | | | 19,786 | |
Other comprehensive income
| | | | | | | | | | | | | | | | | | | | | | |
| Unrealized gain on investment, net of tax effect of $4,622 | | | | | | | | | | | | | | | | | 6,652 | | | | 6,652 | |
| Minimum pension liability adjustment, net of tax effect of $188 | | | | | | | | | | | | | | | | | 273 | | | | 273 | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | 26,711 | |
| Stock-based compensation | | | | | | | | | 1,056 | | | | | | | | | | | | 1,056 | |
| Stock option exercise | | | | | | | | | 19 | | | | | | | | | | | | 19 | |
| Common stock buyback | | | | | | | | | (144 | ) | | | | | | | | | | | (144 | ) |
| Dividends paid ($1.02 per share) | | | | | — | | | | — | | | | (9,319 | ) | | | — | | | | (9,319 | ) |
Balances, December 31, 2004 | | | | $ | 9,516 | | | | 14,306 | | | | 148,525 | | | | 12,344 | | | | 184,691 | |
See accompanying notes to consolidated financial statements
32
SJW CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 (in thousands)
| | | | 2004
| | 2003
(Restated,
see Note 9)
| | 2002
(Restated,
see Note 9)
|
|---|
Operating activities:
| | | | | | | | | | | | | | |
| Net income | | | | $ | 19,786 | | | | 18,677 | | | | 14,232 | |
Adjustments to reconcile net income to net cash provided by operating activities:
| | | | | | | | | | | | | | |
| Depreciation and amortization | | | | | 18,481 | | | | 15,225 | | | | 14,013 | |
| Deferred income taxes | | | | | 10,110 | | | | 6,398 | | | | 2,998 | |
| Stock-based compensation | | | | | 1,056 | | | | 492 | | | | — | |
| Condemnation gain, net of taxes | | | | | (3,776 | ) | | | — | | | | — | |
| Gain on sale of nonutility property, net of taxes | | | | | — | | | | (3,030 | ) | | | — | |
Changes in operating assets and liabilities:
| | | | | | | | | | | | | | |
| Accounts receivable and accrued utility revenue | | | | | (217 | ) | | | 1,634 | | | | (2,522 | ) |
| Accounts payable, purchased power and other current liabilities | | | | | (440 | ) | | | 1,579 | | | | (134 | ) |
| Accrued pump taxes and purchased water | | | | | 632 | | | | 80 | | | | 53 | |
| Accrued taxes | | | | | 423 | | | | (204 | ) | | | (548 | ) |
| Accrued interest | | | | | — | | | | 375 | | | | 108 | |
| Accrued payroll | | | | | 307 | | | | 193 | | | | 145 | |
| Work order deposits | | | | | (738 | ) | | | 677 | | | | 398 | |
| Prepaid Expenses and Materials and Supplies | | | | | (192 | ) | | | (304 | ) | | | (406 | ) |
| Deferred Revenue | | | | | (46 | ) | | | (23 | ) | | | (37 | ) |
| Other noncurrent assets and noncurrent liabilities | | | | | (4,739 | ) | | | (1,922 | ) | | | 2,446 | |
| Refund due to customers | | | | | — | | | | — | | | | (531 | ) |
| Other changes, net | | | | | 584 | | | | 2,177 | | | | (1,008 | ) |
Net cash provided by operating activities | | | | | 41,231 | | | | 42,024 | | | | 29,207 | |
Investing activities:
| | | | | | | | | | | | | | |
| Additions to utility plant | | | | | (40,375 | ) | | | (44,467 | ) | | | (37,119 | ) |
| Additions to nonutility property | | | | | (1,888 | ) | | | (17,780 | ) | | | (1,352 | ) |
| Cost to retire utility plant, net of salvage | | | | | (1,398 | ) | | | (780 | ) | | | (356 | ) |
| Proceeds from condemnation, net of legal fees | | | | | 8,177 | | | | — | | | | — | |
| Proceeds from sale of nonutility property | | | | | — | | | | 5,370 | | | | — | |
Net cash used in investing activities | | | | | (35,484 | ) | | | (57,657 | ) | | | (38,827 | ) |
Financing activities:
| | | | | | | | | | | | | | |
| Borrowings from line of credit | | | | | — | | | | 14,000 | | | | 50,763 | |
| Repayments of line of credit | | | | | — | | | | (25,450 | ) | | | (50,813 | ) |
| Long-term borrowings | | | | | — | | | | 29,900 | | | | (53 | ) |
| Repayments of long-term borrowings | | | | | (252 | ) | | | (176 | ) | | | — | |
| Dividends paid | | | | | (9,319 | ) | | | (8,861 | ) | | | (8,405 | ) |
| Common stock buyback | | | | | (144 | ) | | | — | | | | — | |
| Exercise of stock options | | | | | 19 | | | | — | | | | — | |
Receipts of advances and contributions in aid of construction
| | | | | 6,680 | | | | 17,694 | | | | 15,242 | |
| Refunds of advances for construction | | | | | (2,110 | ) | | | (1,704 | ) | | | (1,627 | ) |
Net cash (used in) provided by financing activities | | | | | (5,126 | ) | | | 25,403 | | | | 5,107 | |
Net change in cash and equivalents | | | | | 621 | | | | 9,770 | | | | (4,513 | ) |
Cash and equivalents, beginning of year | | | | | 10,278 | | | | 508 | | | | 5,021 | |
Cash and equivalents, end of year | | | | $ | 10,899 | | | | 10,278 | | | | 508 | |
Cash paid during the year for:
| | | | | | | | | | | | | | |
| Interest | | | | $ | 10,504 | | | | 9,148 | | | | 7,782 | |
| Income taxes | | | | $ | 5,286 | | | | 7,720 | | | | 8,800 | |
See accompanying notes to consolidated financial statements
33
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(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 non-current 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 properties, warehouse 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 Financial Accounting Standards Board (FASB) Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (see Note 9).
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 (see Note 10).
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 2004, 2003, and 2002 was $341, $330, and $603, respectively. Construction in progress was $4,595, $4,000, and $5,720, at December 31, 2004, 2003, and 2002, respectively.
The major components of depreciable plant and equipment as of December 31, 2004 and 2003 are as follows:
| | | | 2004
| | 2003
|
|---|
| Equipment | | | | $ | 101,337 | | | | 96,553 | |
| Transmission and distribution | | | | | 479,729 | | | | 454,284 | |
| Office buildings and other structures | | | | | 24,354 | | | | 19,282 | |
| Total depreciable plant and equipment | | | | $ | 605,420 | | | | 570,119 | |
Depreciation is computed using the straight-line method over the estimated service lives of the assets, ranging from 5 to 75 years. The estimated service lives of utility plant are as follows:
| | | | Useful Lives
|
|---|
| Equipment | | | | 5 to 35 years |
| Transmission and distribution plant | | | | 35 to 75 years |
| Office buildings and other structures | | | | 7 to 50 years |
34
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
Note 1. Summary of Significant Accounting Policies (Continued)
For the years 2004, 2003, and 2002 the aggregate provisions for depreciation approximated 3.6%, 3.2%, 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 utility plant for the years ended December 31, 2004, 2003 and 2002 was $17,498, $14,435 and $13,480, respectively.
Utility Plant 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 ranging from 5 to 70 years. The company continually evaluates the recoverability of intangible assets by assessing whether the amortization of the balance over the remaining life can be recovered through the expected and undiscounted future cash flows.
Non-utility Property
Non-utility property is recorded at cost and consists primarily of land, buildings, parking facilities and water conditioning equipment. The major components of non-utility property as of December 31, 2004 and 2003 are as follows:
| | | | 2004
| | 2003
|
|---|
| Land | | | | $ | 8,139 | | | | 9,485 | |
| Buildings and improvements | | | | | 26,784 | | | | 25,202 | |
| Intangibles | | | | | 231 | | | | 231 | |
| Total non-utility property | | | | $ | 35,154 | | | | 34,918 | |
Depreciation is computed using accelerated depreciation methods over the estimated useful lives of the assets, ranging from 5 to 39 years.
Impairment of Long-Lived Assets
In accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the long-lived assets of the Company are reviewed for impairment when changes in circumstances or events require adjustments to the carrying values of these assets. These assets consist primarily of utility plant in service, non-utility property, intangible assets and regulatory assets.
Cash and Equivalents
Cash and equivalents include certain highly liquid investments with remaining maturities at date of purchase of three months or less. Cash equivalents are stated at cost plus accrued interest, which approximates fair value. The cash and equivalents balance as of December 31, 2004 was $10,899 which included $2,010 cash deposited in a bank and $8,889 short-term investments, consisting primarily of certificates of deposit. The cash and equivalents balance as of December 31, 2003 was $10,278 which included $4,278 cash deposited in a bank and $6,000 in short-term investments, consisting primarily of United States treasury bills.
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 accounted for under SFAS 115, Accounting for Marketable Securities, as an available-for-sale marketable security. The investment is reported at quoted market price with the unrealized gain or loss reported as other comprehensive income.
35
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
Note 1. Summary of Significant Accounting Policies (Continued)
Other 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 reacquisition and issuance costs are amortized over the term of the related debt to interest expense in the Statement of Income.
Regulatory Assets and Liabilities
The Company records regulatory assets for future revenues expected to be realized in customers’ rates when certain items are recognized as expenses for ratemaking purposes. The income tax temporary differences relate primarily to the difference between book and income tax depreciation on utility plant that was placed in service before the CPUC adopted normalization for rate making purposes. Previously the tax effect was passed onto customers. In the future, when such timing differences reverse, the Company would be able to include the impact of the deferred tax reversal in customer rates. The differences will reverse over the remaining book lives of the related assets. 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 ratemaking purposes. Although realization is not assured, management believes it is more likely than not that all of the regulatory asset will be realized.
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 regulatory asset by assessing whether the amortization of the balance over the remaining life can be recovered through the expected and undiscounted future cash flows.
In addition, regulatory assets include items that are not recognized for ratemaking purposes, such as certain expenses related to postretirement benefits, which are expected to be recoverable in future customer rates.
Regulatory liabilities reflect temporary differences provided at higher than the current tax rate, which will flow through to future ratepayers, and unamortized investment tax credits.
Regulatory assets and liabilities are comprised of the following as of December 31:
| | | | 2004
| | 2003
|
|---|
Regulatory assets:
| | | | | | | | | | |
| Income tax temporary differences | | | | $ | 8,085 | | | | 8,577 | |
| Asset retirement obligation | | | | | 1,200 | | | | 1,182 | |
| Postretirement benefits other than pensions | | | | | 857 | | | | 370 | |
| Total regulatory assets | | | | $ | 10,142 | | | | 10,129 | |
Regulatory liabilities:
| | | | | | | | | | |
| Future tax benefits to ratepayers | | | | $ | 2,078 | | | | 2,153 | |
| Net Regulatory Assets included in Balance Sheet | | | | $ | 8,064 | | | | 7,976 | |
Income Taxes
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 current tax rates in effect.
36
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
Note 1. Summary of Significant Accounting Policies (Continued)
To the extent permitted by the CPUC, investment tax credits resulting from utility plant additions are deferred and amortized over the estimated useful lives of the related property.
Advances for Construction and Contributions in Aid of Construction
Advances for construction received after 1981 are being refunded ratably over 40 years. Prior customer advances are refunded based on 22% of related revenues. Estimated refunds for 2005, 2006, 2007, 2008, and 2009 are $1,949, $1,874, $1,806, $1,742 and $1,684, respectively.
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 Obligation
SJW Corp.’s asset retirement obligation is recorded as a liability included in other non-current liabilities. It reflects principally the retirement costs of wells, which by law, the wells need to be remediated upon retirement. Retirement costs have historically been recovered through rates at the time of retirement. As a result, the liability is offset by a regulatory asset. For the years ended December 31, 2004 and 2003, the asset retirement obligation is as follows:
| | | | 2004
| | 2003
|
|---|
| Retirement obligation | | | | $ | 4,613 | | | | 4,682 | |
| Discount rate | | | | | 6% | | | | 6% | |
| Present value | | | | | 711 | | | | 700 | |
| Regulatory asset | | | | | 1,200 | | | | 1,182 | |
Revenue
SJW Corp. recognizes its regulated and non-regulated revenue in accordance with SEC Staff Accounting Bulletin 104, “Revenue Recognition”, when services have been rendered.
San Jose Water Company’s revenue from metered customers includes billings to customers based on meter readings plus an estimate of water used between the customers’ last meter reading and the end of the accounting period. The company reads the majority of its customers’ meters on a bi-monthly basis and records its revenue based on its meter reading results. Revenue from the meter reading date to the end of the accounting period is estimated based on historical usage patterns, production records and the effective tariff rates. Actual results could differ from those estimates, which would result in adjusting the operating revenue in the period which the revision to San Jose Water Company’s estimates are determined. Operating revenue in 2004, 2003, and 2002 includes $3,807, $3,339, and $3,257 respectively, from the operation of the City of Cupertino municipal water system.
Revenue from San Jose Water Company’s non-regulated utility operations, billing or maintenance agreements are recognized when services have been rendered. Revenue from SJW Land Company is recognized ratably over the term of the lease or when parking services have been rendered. Revenue from Crystal Choice Water Service LLC is recognized at the time of the delivery of water conditioning and purification equipment or ratably over the term of the lease of the water conditioning and purification equipment.
37
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
Note 1. Summary of Significant Accounting Policies (Continued)
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, 2004 and 2003, the balancing account had a net under-collected balance of $617 and a net over-collected balance of $7, 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 utilizes the Black-Scholes option-pricing model to compute the fair value of options at grant date as the basis for the stock-based compensation recorded in the Corporation’s consolidated financial statements.
Maintenance Expense
Planned major maintenance projects are charged to expense as incurred. SJW Corp. does not accrue maintenance costs prior to periods in which they are incurred.
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 calculated 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 was effective on March 2, 2004. Basic and diluted earnings and comprehensive income per share for all periods presented reflect the impact of this stock split.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Note 2. Capitalization
SJW Corp. is authorized to issue 18,000,000 shares of $1.042 par value common stock. At December 31, 2004 and 2003, 9,135,441 shares of common stock were issued and outstanding.
On April 29, 2004, the Board of Directors of SJW Corp. authorized a stock repurchase program to repurchase up to 100,000 shares of its outstanding common stock over a 36 month period following its announcement. SJW Corp. repurchased 4,295 shares of its outstanding common stock at the prevailing market price in the open market at an aggregate cost of $144. All repurchased shares are considered authorized and unissued.
At December 31, 2004 and 2003, 176,407 shares of $25 par value preferred stock were authorized. At December 31, 2004 and 2003, none were outstanding.
38
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
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:
| | | | 2004
| | 2003
| | 2002
|
|---|
| Maximum short-term borrowing: | | | | $ | — | | | | 13,950 | | | | 11,500 | |
| Average amount outstanding | | | | | — | | | | 6,251 | | | | 7,219 | |
| Weighted average interest rate | | | | | — | | | | 2.6% | | | | 3.1% | |
| Interest rate at December 31 | | | | | 4.25% | | | | 3.0% | | | | 3.3% | |
| Balance as of December 31 | | | | $ | — | | | | — | | | | 11,450 | |
San Jose Water Company issued a standby letter of credit with a commercial bank in the amount of $2,000 in support of its $2,500 Safe Drinking Water Act State Revolving Fund Loan which will be funded in 2005. The letter of credit will be renewed annually in December and the amount of coverage can be reduced as the principal balance decreases. As of December 31, 2004, the loan has not been funded.
Note 4. Long-Term Debt
Long-term debt as of December 31 was as follows:
Description
| | | | Due Date
| | 2004
| | 2003
|
|---|
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 | | | | 20,000 | |
| Total senior notes | | | | | | | | | 130,000 | | | | 130,000 | |
| Mortgage loans 5.96% | | | | | 2013 | | | | 9,614 | | | | 9,798 | |
444 West Santa Clara Street, L.P. 7.80%
(non-recourse to SJW Land Company) | | | | | 2011 | | | | 4,265 | | | | 4,333 | |
| Total debt | | | | | | | | | 143,879 | | | | 144,131 | |
| Less: Current portion | | | | | | | | | 275 | | | | 252 | |
| Total long-term debt, less current portion | | | | | | | | | 143,604 | | | | 143,879 | |
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 12-calendar month period would be less than 175% of interest charges.
The mortgage loans, which are the obligations of SJW Land Company, are due in 2013. These loans amortize over 25 years, are secured by two lease properties and carry a fixed interest rate with 120 monthly principal and interest payments. The loan agreements generally restrict the company from prepayment in the first five years and require submission of periodic financial reports as part of the loan covenants. An amortization schedule of the mortgage loans is as follows:
39
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
Note 4. Long-Term Debt (Continued)
| | | | Amortization Schedule
| |
|---|
Year
| | | | Total Payment
| | Interest
| | Principal
|
|---|
| 2005 | | | | $ | 763 | | | | 568 | | | | 195 | |
| 2006 | | | | | 763 | | | | 556 | | | | 207 | |
| 2007 | | | | | 763 | | | | 544 | | | | 219 | |
| 2008 | | | | | 763 | | | | 530 | | | | 233 | |
| 2009 | | | | | 763 | | | | 516 | | | | 247 | |
| Thereafter | | | | $ | 10,155 | | | | 1,642 | | | | 8,513 | |
444 West Santa Clara Street, L.P., in which SJW Land Company owns a 70% limited partnership interest, has a mortgage loan in the outstanding amount of $4,265 as of December 31, 2004. The mortgage loan is due in April 2011 and amortized over 25 years with a fixed interest rate of 7.8%. The loan is secured by the partnership’s real property and is non-recourse to SJW Land Company. An amortization schedule of the mortgage loan is as follows:
| | | | Amortization Schedule
| |
|---|
Year
| | | | Total Payment
| | Interest
| | Principal
|
|---|
| 2005 | | | | $ | 410 | | | | 330 | | | | 80 | |
| 2006 | | | | | 410 | | | | 323 | | | | 87 | |
| 2007 | | | | | 410 | | | | 316 | | | | 94 | |
| 2008 | | | | | 410 | | | | 308 | | | | 102 | |
| 2009 | | | | | 410 | | | | 300 | | | | 110 | |
| Thereafter | | | | $ | 6,759 | | | | 2,967 | | | | 3,792 | |
The fair value of long-term debt as of December 31, 2004 and 2003 was approximately $169,039 and $166,949, respectively, using a discounted cash flow analysis, based on the current rates for similar financial instruments of the same duration.
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:
| | | | 2004
| | 2003
| | 2002
|
|---|
| “Expected” federal income tax | | | | $ | 11,918 | | | | 10,957 | | | | 8,361 | |
Increase (decrease) in taxes attributable to:
| | | | | | | | | | | | | | |
| State taxes, net of federal income tax benefit | | | | | 1,957 | | | | 1,799 | | | | 1,373 | |
| Dividend received deduction | | | | | (305 | ) | | | (303 | ) | | | (302 | ) |
| Other items, net | | | | | 698 | | | | 176 | | | | 226 | |
| | | | | $ | 14,268 | | | | 12,629 | | | | 9,658 | |
The components of income tax expense were:
| | | | 2004
| | 2003
| | 2002
|
|---|
Current:
| | | | | | | | | | | | | | |
| Federal | | | | $ | 3,516 | | | | 4,199 | | | | 4,740 | |
| State | | | | | 2,681 | | | | 2,374 | | | | 1,986 | |
Deferred:
| | | | | | | | | | | | | | |
| Federal | | | | | 7,627 | | | | 6,129 | | | | 2,838 | |
| State | | | | | 444 | | | | (73 | ) | | | 94 | |
| | | | | $ | 14,268 | | | | 12,629 | | | | 9,658 | |
40
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
Note 5. Income Taxes (Continued)
| | | | 2004
| | 2003
| | 2002
|
|---|
| Income taxes included in operating expenses | | | | $ | 11,644 | | | | 10,523 | | | | 9,658 | |
| Income taxes included in gain on sale or condemnation of nonutility property | | | | | 2,624 | | | | 2,106 | | | | — | |
| | | | | $ | 14,268 | | | | 12,629 | | | | 9,658 | |
The components of the net deferred tax liability as of December 31 was as follows:
| | | | 2004
| | 2003
|
|---|
Deferred tax assets:
| | | | | | | | | | |
| Advances and contributions | | | | $ | 14,262 | | | | 14,291 | |
| Unamortized investment tax credit | | | | | 1,031 | | | | 1,063 | |
| Pensions and postretirement benefits | | | | | 3,020 | | | | 2,784 | |
| California franchise tax | | | | | 749 | | | | 628 | |
| Other | | | | | 466 | | | | 575 | |
| Total deferred tax assets | | | | | 19,528 | | | | 19,341 | |
Deferred tax liabilities:
| | | | | | | | | | |
| Utility plant | | | | | 45,623 | | | | 39,596 | |
| Investment | | | | | 14,724 | | | | 10,102 | |
| Deferred gain-property transfer | | | | | 6,161 | | | | 3,537 | |
| Debt reacquisition costs | | | | | 942 | | | | 991 | |
| Other | | | | | 1,585 | | | | 1,829 | |
| Total deferred tax liabilities | | | | | 69,035 | | | | 56,055 | |
| Net deferred tax liabilities | | | | $ | 49,507 | | | | 36,714 | |
Based upon the level of historical taxable income and projections for future taxable income over the periods for 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 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 ranging from 5–70 years.
Amortization expense for the intangible assets was $288 for each of the years ended December 31, 2004, 2003 and 2002. Amortization expense for 2005, 2006, 2007, 2008 and 2009 is anticipated to be $288 per year.
The costs of intangible assets as of December 31, 2004 and 2003 are as follows:
| | | | 2004
| | 2003
|
|---|
| Concession fees | | | | $ | 6,800 | | | | 6,800 | |
| Other intangibles | | | | | 1,040 | | | | 1,040 | |
| Intangible assets | | | | | 7,840 | | | | 7,840 | |
Less: Accumulated amortization
| | | | | | | | | | |
| Concession fees | | | | | 1,972 | | | | 1,700 | |
| Other intangibles | | | | | 299 | | | | 283 | |
| Net intangible assets | | | | $ | 5,569 | | | | 5,857 | |
41
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
Note 7. Commitments
San Jose Water Company purchases water from the SCVWD. Delivery schedules for purchased water are based on a contract year beginning July 1, and are negotiated every three years under terms of a master contract with SCVWD expiring in 2051. For the years ending December 31, 2004, 2003 and 2002, San Jose Water Company purchased from SCVWD 21,500 million gallons ($31,500), 20,700 million gallons ($28,100) and 21,900 million gallons ($27,900), respectively, of contract water. Based on current prices and estimated deliveries, San Jose Water Company expects to purchase a minimum of 90% of the delivery schedule, or 19,800 million gallons ($30,100) of water at the current contract water rate of $1,519 per million gallons, from SCVWD in the contract year ending June 30, 2005. Additionally, San Jose Water Company purchases non-contract water from SCVWD on an “as needed” basis and if the water supply is available from SCVWD.
The contract water rates are determined by the SCVWD. These rates are adjusted periodically and coincide with SCVWD’s fiscal year, which ends annually on June 30. The contract water rates for SCVWD’s fiscal year ended 2005, 2004 and 2003 were $1,519, $1,412 and $1,289, respectively.
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. San Jose Water Company paid a one-time, up front concession fee of $6,800 to the City of Cupertino which is amortized over the contract term. 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
SJW Corp. is subject to litigation incidental to its business. There are no pending legal proceedings to which the Corporation or any of its subsidiaries is a party or to which any of its properties is the subject that are expected to have a material effect on the Corporation’s financial position, results of operations or cash flows. The Corporation maintains a reserve for litigation and claims, which had a balance of $442 and $648 as of December 31, 2004 and 2003, respectively.
Note 9. Partnership Interest Restatement
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 12-year long-term lease.
In January 2004, SJW Corp. adopted Interpretation No. 46(R), “Consolidation of Variable Interest Entities” issued by the Financial Accounting Standards Board (FASB). This interpretation provides guidance for determining when a primary beneficiary should consolidate a variable interest entity or equivalent structure, that functions to support the activities of the primary beneficiary. As a result of the adoption of FIN46R, the operations of the limited partnership are now consolidated by SJW Corp. This partnership had previously been accounted for under the equity method of accounting.
42
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
Note 9. Partnership Interest Restatement (Continued)
As a result of adopting FIN46R, the Corporation has restated its previously reported December 31, 2003 Consolidated Balance Sheet and its December 31, 2003 Consolidated Statements of Income and Comprehensive Income to include the consolidated operations of the partnership as follows:
| | | | December 31, 2003
| |
|---|
| | | | As
Previously
Reported
| | As
Restated
|
|---|
Consolidated Balance Sheets:
| | | | | | | | | | |
Assets
| | | | | | | | | | |
| Non-utility property | | | | $ | 29,665 | | | | 34,918 | |
| Less: accumulated depreciation | | | | | 2,036 | | | | 2,349 | |
| Net non-utility property | | | | $ | 27,629 | | | | 32,569 | |
| Cash and equivalents | | | | | 10,036 | | | | 10,278 | |
| Total current assets | | | | | 27,098 | | | | 27,340 | |
| Investment in affiliate | | | | | 1,110 | | | | — | |
| Other assets | | | | | 5,594 | | | | 6,049 | |
| Total other assets | | | | | 48,266 | | | | 47,611 | |
| Total assets | | | | | 511,717 | | | | 516,244 | |
Liabilities:
| | | | | | | | | | |
| Long-term debt, less current portion | | | | | 139,614 | | | | 143,879 | |
| Current portion of partnership debt | | | | | 184 | | | | 252 | |
| Total capitalization | | | | | 305,982 | | | | 310,247 | |
| Other non-current liabilities | | | | | 9,520 | | | | 9,714 | |
| Total capitalization and liabilities | | | | | 511,717 | | | | 516,244 | |
| | | | Twelve Months Ended
December 31, 2003
| |
|---|
| | | | As
Previously
Reported
| | As
Restated
|
|---|
Consolidated Statements of Income and Comprehensive Income:
| | | | | | | | | | |
| Operating revenue | | | | $ | 149,732 | | | | 150,454 | |
| Total operating expense | | | | | 126,778 | | | | 127,259 | |
| Operating income | | | | | 22,954 | | | | 23,195 | |
| Other, net | | | | | (73 | ) | | | 216 | |
| Net income | | | | | 18,677 | | | | 18,677 | |
| Comprehensive income | | | | | 20,712 | | | | 20,712 | |
43
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
Note 9. Partnership Interest Restatement (Continued)
| | | | Twelve Months Ended
December 31, 2003
| |
|---|
| | | | As
Previously
Reported
| | As
Restated
|
|---|
Consolidated Statements of Income and Comprehensive Income:
| | | | | | | | | | |
| Operating revenue | | | | $ | 145,652 | | | $ | 146,373 | |
| Total operating expense | | | | | 125,094 | | | | 125,631 | |
| Operating income | | | | | 20,558 | | | | 20,742 | |
| Other, net | | | | | 245 | | | | 279 | |
| Net income | | | | | 14,232 | | | | 14,232 | |
| Comprehensive income | | | | | 12,550 | | | | 12,550 | |
There was no cumulative impact on retained earnings that resulted from the adoption of FIN46R.
The consolidated financial statements of SJW Corp. at December 31, 2004 and 2003 include the operating results of 444 West Santa Clara Street, L. P. Inter-company balances were eliminated. Minority interest of $67 and $72 was included in other income in the Consolidated Statements of Income and Comprehensive Income at December 31, 2004 and 2003, respectively. Included in other non-current liabilities of SJW Corp.’s Balance Sheet is minority interest of $24 and $194 at December 31, 2004 and 2003, 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 Service LLC engages in the sale and rental of water conditioning equipment. SJW Corp. owns approximately 75% of the joint venture and invested $75 in 2003. No additional investment was made during 2004. The consolidated financial statements of SJW Corp. at December 31, 2004 and 2003 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 $13, $55, and $87 was included in other losses in the Consolidated Statements of Income and Comprehensive Income at December 31, 2004, 2003 and 2002, respectively. Included in other non-current liabilities of SJW Corp.’s Balance Sheet is minority interest of $144 and $157 at December 31, 2004 and 2003, 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 36 months 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. The Investment Manager following the required investment guidelines has achieved a 13.4% return on their equity investments since their retention in 1984, while the Standard and Poor’s 500 index was 13.2% for the same period. Additionally, Wachovia Securities, LLC 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 three to five-year
44
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
Note 11. Employee Benefit Plans (Continued)
period and/or full market cycle. These standards include a specific rate of return, a return of 4% in excess of inflation and performance better than a similarly balanced fund using Standard and Poor’s 500 and Lehman Brothers Government/Corporate Index. Satisfactory performance will also be achieved if the total return over a full market cycle is in the first quartile of a blended universe (60/40) of equity and fixed income funds.
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; 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 of any single issuer; generally, acquire a security of any single issuer whose costs exceed 6% of the fund value; acquire any 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; or participate in any joint trading account.
San Jose Water Company has a Supplemental Executive Retirement Plan, which is a defined benefit plan under which the company will pay supplemental pension benefits to key executives in addition to the amounts received under the retirement plan. The annual cost of this plan has been included in the determination of the net periodic benefit cost shown below. The plan, which is unfunded, had a projected benefit obligation of $4,378, $5,008 and $4,583 as of December 31, 2004, 2003, and 2002, respectively, and net periodic pension cost of $426, $583 and $606 for 2004, 2003, and 2002, respectively.
Flexible Spending Plan
Effective February 1, 2004, San Jose Water Company established a Flexible Spending Account for its employees for the purpose of providing eligible employees with the opportunity to choose from among the fringe benefits available under the plan. The flexible spending plan is intended to qualify as a cafeteria plan under the provisions of the Internal Revenue Code Section 125. The flexible spending plan allows employees to save pre-tax income in a Health Care Spending Account (HCSA) and/or a Dependent Care Spending Account (DCSA) to help defray the cost of out-of-pocket medical and dependent care expenses. The annual maximum limit under the HCSA and DCSA plans is $2.5 and $5, respectively.
Medicare
In December 2003, federal legislation was passed reforming Medicare and introducing the Medicare Part D prescription drug program. San Jose Water Company determined that the new legislation has no impact on its postretirement benefit plan under SFAS No. 116 “Employers’ Accounting for Postretirement Benefits — Other Than Pensions.” Because San Jose Water Company has a union contract with its employees whereby San Jose Water Company provides medical benefits at a fixed cost to its retirees, San Jose Water Company’s medical costs for postretirement benefits would not be affected by cost fluctuations resulting from the Medicare Part D prescription drug program.
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 $756, $708 and $671 in 2004, 2003, and 2002, 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.
45
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
Note 11. Employee Benefit Plans (Continued)
Net periodic cost for the defined benefit plans and other postretirement benefits was calculated using the following assumptions:
| | | | Pension Benefits
| | Other Benefits
| |
|---|
| | | | 2004
| | 2003
| | 2002
| | 2004
| | 2003
| | 2002
|
|---|
Weighted-Average
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assumptions as of Dec. 31 | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | % | |
| Discount rate | | | | | 6.00 | | | | 6.25 | | | | 6.75 | | | | 6.00 | | | | 6.25 | | | | 6.75 | |
| Expected return on plan assets | | | | | 8.00 | | | | 8.00 | | | | 8.00 | | | | 8.00 | | | | 8.00 | | | | 8.00 | |
| Rate of compensation increase | | | | | 4.00 | | | | 4.00 | | | | 4.00 | | | | n.a. | | | | n.a. | | | | n.a. | |
The Company used a 6.25% discount rate for calculation of 2004 expense and a 6.00% discount rate to determine value of benefit obligation at year-end. 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 for actuarial expense calculation purposes. Both rates reflect the appropriate economic conditions at time of measurement.
The Company has an expected rate of return on plan assets of 8%. The actual annual rate of return since 1984 thru year-end of 2004 is 10.7%. However, the Company uses the more conservative assumption that is considered to be in line with other professionally administered retirement asset trusts.
Net periodic costs for the defined benefit plans and other postretirement benefits for the years ended December 31 was as follows:
| | | | Pension Benefits
| | Other Benefits
| |
|---|
| | | | 2004
| | 2003
| | 2002
| | 2004
| | 2003
| | 2002
|
|---|
Components of Net Periodic Benefit Cost
|
| Service cost | | | | $ | 1,753 | | | | 1,413 | | | | 1,148 | | | | 123 | | | | 46 | | | | 41 | |
| Interest cost | | | | | 3,048 | | | | 2,741 | | | | 2,640 | | | | 235 | | | | 122 | | | | 118 | |
| Expected return on assets | | | | | (2,557 | ) | | | (2,191 | ) | | | (2,659 | ) | | | (50 | ) | | | (41 | ) | | | (40 | ) |
| Amortization of transition obligation | | | | | 56 | | | | 56 | | | | 54 | | | | 56 | | | | 56 | | | | 56 | |
| Amortization of prior service cost | | | | | 493 | | | | 286 | | | | 354 | | | | 122 | | | | 16 | | | | 16 | |
| Recognized actuarial loss | | | | | 402 | | | | 412 | | | | 57 | | | | — | | | | — | | | | — | |
| Net periodic benefit cost | | | | $ | 3,195 | | | | 2,717 | | | | 1,594 | | | | 486 | | | | 199 | | | | 191 | |
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
| |
|---|
| | | | 2004
| | 2003
| | 2002
| | 2004
| | 2003
| | 2002
|
|---|
Change in Benefit Obligation
|
Benefit obligation at beginning of year
| | | | $ | 47,279 | | | | 41,466 | | | | 37,021 | | | | 3,739 | | | | 1,821 | | | | 1,709 | |
| Service cost | | | | | 1,753 | | | | 1,413 | | | | 1,148 | | | | 123 | | | | 46 | | | | 41 | |
| Interest cost | | | | | 3,048 | | | | 2,741 | | | | 2,640 | | | | 235 | | | | 122 | | | | 118 | |
| Amendments | | | | | 2,794 | | | | — | | | | 424 | | | | — | | | | 1,711 | | | | — | |
| Actuarial loss | | | | | 1,863 | | | | 3,516 | | | | 1,931 | | | | 215 | | | | 152 | | | | 66 | |
| Benefits paid | | | | | (2,041 | ) | | | (1,857 | ) | | | (1,698 | ) | | | (125 | ) | | | (113 | ) | | | (113 | ) |
| Benefit obligation at end of year | | | | $ | 54,696 | | | | 47,279 | | | | 41,466 | | | | 4,187 | | | | 3,739 | | | | 1,821 | |
46
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
Note 11. Employee Benefit Plans (Continued)
| | | | Pension Benefits
| | Other Benefits
| |
|---|
| | | | 2004
| | 2003
| | 2002
| | 2004
| | 2003
| | 2002
|
|---|
Change in Plan Assets
|
Fair value of assets at beginning 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% | |
| | | | | $ | 32,333 | | | | 27,832 | | | | 34,010 | | | | 521 | | | | 507 | | | | 394 | |
| Actual return on plan assets | | | | | 1,746 | | | | 4,344 | | | | (4,713 | ) | | | 1 | | | | — | | | | 7 | |
| Employer contributions | | | | | 2,568 | | | | 2,000 | | | | 233 | | | | 297 | | | | 114 | | | | 206 | |
| Benefits paid | | | | | (2,041 | ) | | | (1,843 | ) | | | (1,698 | ) | | | (107 | ) | | | (100 | ) | | | (100 | ) |
| | | | | $ | 34,606 | | | | 32,333 | | | | 27,832 | | | | 712 | | | | 521 | | | | 507 | |
Fair value of assets at end of year;
|
| Debt securities | | | | $ | 10,428 | | | | 7,116 | | | | 8,653 | | | | — | | | | — | | | | — | |
| | | | | | 30.1% | | | | 22.0% | | | | 31.1% | | | | — | | | | — | | | | — | |
| Equity securities | | | | $ | 23,487 | | | | 21,677 | | | | 16,461 | | | | — | | | | — | | | | — | |
| | | | | | 67.9% | | | | 67.0% | | | | 59.1% | | | | — | | | | — | | | | — | |
| Cash & equivalents | | | | $ | 691 | | | | 3,540 | | | | 2,718 | | | | 712 | | | | 521 | | | | 507 | |
| | | | | | 2.0% | | | | 11.0% | | | | 9.8% | | | | 100% | | | | 100% | | | | 100% | |
| Total | | | | $ | 34,606 | | | | 32,333 | | | | 27,832 | | | | 712 | | | | 521 | | | | 507 | |
Funded Status
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Plan assets less benefit obligation | | | | $ | (20,089 | ) | | | (15,047 | ) | | | (13,633 | ) | | | (3,474 | ) | | | (3,218 | ) | | | (1,313 | ) |
| Unrecognized transition obligation | | | | | 40 | | | | 96 | | | | 152 | | | | 396 | | | | 453 | | | | 509 | |
| Unamortized prior service cost | | | | | 4,286 | | | | 1,985 | | | | 2,270 | | | | 1,613 | | | | 1,735 | | | | 39 | |
| Unamortized actuarial loss | | | | | 12,835 | | | | 10,665 | | | | 9,388 | | | | 509 | | | | 229 | | | | 20 | |
| Accrued benefit cost | | | | $ | (2,928 | ) | | | (2,301 | ) | | | (1,823 | ) | | | (956 | ) | | | (801 | ) | | | (745 | ) |
In 2005, the company expects to make a contribution of $2,264 and $297 to the pension plan and other post retirement benefit plan, respectively.
Benefits to retires expected to be paid in the next five years are:
| | | | Pension Plan
| | Other
Postretirement
Benefit Plan
|
|---|
| 2005 | | | | $ | 2,062 | | | $ | 133 | |
| 2006 | | | | | 2,129 | | | | 140 | |
| 2007 | | | | | 2,136 | | | | 151 | |
| 2008 | | | | | 2,258 | | | | 155 | |
| 2009 | | | | | 2,465 | | | | 165 | |
47
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
Note 11. Employee Benefit Plans (Continued)
Amounts recognized on the balance sheet consist of:
| | | | Pension Benefits
| | Other Benefits
| |
|---|
| | | | 2004
| | 2003
| | 2002
| | 2004
| | 2003
| | 2002
|
|---|
| Accrued benefit cost | | | | $ | (2,928 | ) | | | (2,301 | ) | | | (1,823 | ) | | | (956 | ) | | | (801 | ) | | | (745 | ) |
| Additional minimum liability | | | | | (6,689 | ) | | | (4,874 | ) | | | (4,541 | ) | | | — | | | | — | | | | — | |
| Intangible asset | | | | | 4,357 | | | | 2,080 | | | | 2,423 | | | | — | | | | — | | | | — | |
| Accumulated other comprehensive loss | | | | | 2,332 | | | | 2,794 | | | | 2,118 | | | | — | | | | — | | | | — | |
| Net amount recognized | | | | $ | (2,928 | ) | | | (2,301 | ) | | | (1,823 | ) | | | (956 | ) | | | (801 | ) | | | (745 | ) |
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 terms 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 Incentive Plan allows SJW Corp. to provide key employees, including officers, and non-employee directors, the opportunity to acquire a meaningful equity interest in SJW Corp. 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, 2004, 4,295 shares have been issued pursuant to the Incentive Plan and 154,732 shares are issuable upon the exercise of outstanding options and deferred restricted stock. At December 31, 2003, no securities were issued pursuant to the equity awards made and 127,407 shares were to be issued upon the exercise of outstanding options and deferred restricted stock. The remaining shares available for issuance under the Incentive plan are 740,973 and 772,593 for the years ended 2004 and 2003, respectively. The total compensation cost charged to income under all plans was $1,163 and $492 for 2004 and 2003, respectively. The total benefits, including non-employee directors converted post-retirement benefits, recorded in shareholders’ equity under all plans were $1,056 and $1,018 for 2004 and 2003, respectively. As of December 31, 2004 and 2003, $162 and $55, respectively, was related to the issuance of deferred restricted stock under dividend equivalent rights and was accrued as a liability. No awards were granted under the Incentive Plan prior to 2003.
Stock Options
Awards in the form of stock option agreements under the Incentive Plan allow executives to purchase common shares at a specified price. 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. In 2004, 266 common shares were issued upon exercise of options. At December 31, 2004, options to purchase 54,739 common shares were issued and outstanding.
| | | | 2004
| | 2003
| | 2002
|
|---|
| Options granted | | | | | 26,076 | | | | 28,929 | | | | N/A | |
| Exercise price | | | | $ | 29.70 | | | $ | 28.00 | | | | N/A | |
| Weighted average remaining life in years | | | | | 8.6 | | | | 9.3 | | | | N/A | |
| Weighted average fair value at date of grant | | | | $ | 5.33 | | | $ | 5.33 | | | | N/A | |
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
48
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
Note 12. Long-Term Incentive Plan and Stock-Based Compensation (Continued)
grant date as a basis for determining stock-based compensation costs for financial reporting purposes. The assumptions utilized include:
| | | | 2004
| | 2003
| | 2002
|
|---|
| Expected dividend yield | | | | | 3.3 | % | | | 3.4 | % | | | N/A | |
| Expected volatility | | | | | 23.6 | % | | | 27 | % | | | N/A | |
| Risk-free interest rate | | | | | 3.22 | % | | | 2.86 | % | | | N/A | |
| Expected holding period in years | | | | | 5.0 | | | | 5.0 | | | | N/A | |
SJW Corp. has recognized stock compensation expense of $74 and $26 for options granted to its executives for the years ended December 31, 2004, and 2003, respectively. No options were granted prior to 2003.
Stock Options
| | | | 2004
| | 2003
| |
|---|
| | | | Shares
| | Weighted-Average
Exercise Price
| | Shares
| | Weighted-Average
Exercise Price
|
|---|
| Outstanding at beginning of year | | | | | 28,929 | | | $ | 28.00 | | | | — | | | | — | |
| Granted | | | | | 26,076 | | | $ | 29.70 | | | | 28,929 | | | $ | 28.00 | |
| Exercised | | | | | (266 | ) | | $ | 28.00 | | | | — | | | | — | |
| Forfeited | | | | | — | | | | — | | | | — | | | | — | |
| Outstanding at end of year | | | | | 54,739 | | | $ | 28.81 | | | | 28,929 | | | $ | 28.00 | |
| Options exercisable at end of year | | | | | 6,961 | | | $ | 28.00 | | | | — | | | | — | |
| Weighted-average fair value of options granted during the year | | | | | | | | $ | 5.33 | | | | | | | $ | 5.33 | |
Options Exercisable
| | | | 2004
| | 2003
| | 2002
|
|---|
Options Outstanding
| | | | | | | | | | | | | | |
| Range of exercise prices | | | | $28.00–29.70 | | $28.00 | | N/A |
| Outstanding at end of year | | | | 54,739 | | 28,929 | | N/A |
| Weighted average remaining life in years | | | | 8.6 | | 9.3 | | N/A |
| Weighted average exercise price | | | | $28.81 | | $28.00 | | N/A |
Deferred Restricted Stock Plans
On June 27, 2003, deferred restricted stock for 41,670 shares of common stock were granted to a key employee of the Company, which vest over a period of three years and are payable upon retirement. Following SFAS No. 123, the deferred restricted stock was 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 when services are rendered. For the year ended December 31, 2004, 13,890 shares are vested and the Company has recognized stock compensation expense of $469 related to this deferred restricted stock. For the year ended December 31, 2003, $234 was recorded as stock compensation expense and no shares were vested.
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 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 the amount of the aggregate annual retainer, as of the date of grant, divided by the fair market value of the Corporation’s common stock on the date of
49
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
Note 12. Long-Term Incentive Plan and Stock-Based Compensation (Continued)
grant. Directors can receive a maximum number of 10 awards for 10 full years of service. On September 1, 2003, 55,524 shares were granted to the directors under the program at a market price of $28.40 per share. With respect to the conversion of existing pension benefits, which 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 when services are rendered. As of December 31, 2004, 3,994 shares were issued pursuant to deferred restricted stock awards to a retired non-employee board member and total vested shares are 28,172. There were no shares issued or vested as of December 31, 2003. In accordance with SFAS No. 123, the Corporation has recognized stock compensation expense of $350 and $141 for the years ended December 31, 2004 and 2003, respectively. %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 the Company’s common stock on the last business day before the date of grant, which will vest on a monthly basis as the retainer would have otherwise been earned. For the year ended December 31, 2004, the Company has granted 3,636 deferred restricted shares in lieu of cash retainer fees at $29.75 per share and recognized stock compensation expense of $108. The Company granted 1,284 deferred restricted shares in 2003 at $28.07 per share and recognized stock compensation expense of $36. No deferred restricted stock was granted in 2002.
Deferred Restricted Stock Outstanding
| | | | 2004
| | 2003
| |
|---|
| | | | Shares
| | Weighted-Average
Issue Price
| | Shares
| | Weighted-Average
Issue Price
|
|---|
| Outstanding at beginning of year | | | | | 98,478 | | | $ | 28.27 | | | | — | | | | — | |
| Issued | | | | | 3,636 | | | $ | 29.75 | | | | 98,478 | | | $ | 28.27 | |
| Exercised | | | | | (3,994 | ) | | $ | 28.40 | | | | — | | | | — | |
| Forfeited | | | | | — | | | | — | | | | — | | | | — | |
| Outstanding at end of year | | | | | 98,120 | | | $ | 28.32 | | | | 98,478 | | | $ | 28.27 | |
| Shares vested | | | | | 46,982 | | | | — | | | | 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 deferred restricted stock allow holders of deferred 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 vest in the same manner as the options and restricted stock. Pursuant to dividend equivalent rights, on January 2, 2004, deferred restricted stock for 723 shares of common stock were granted relating to the options and deferred restricted stock for 1,185 shares of common stock were granted relating to the deferred restricted stock plans, 35 shares were issued during the year to a retired non-employee board member. For the years ended December 31, 2004 and 2003, the Company has recognized compensation expense for dividend rights of $162 and $55, respectively.
Note 13. Sale of Non-utility Property
On March 11, 2003, SJW Corp. sold San Tomas station, a non-utility property, to the SCVWD for a contract price of $5,400. SJW Corp. recognized a gain on sale of non-utility 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.
50
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
Note 14. Condemnation Gain
In January 2002, SJW Land Company entered into an Agreement for Possession and Use (the Agreement) with Valley Transportation Agency (VTA) whereby SJW Land Company granted VTA an irrevocable right to possession and use of 1.23 acres of the company’s parking lot property for the development of a light rail station while reserving the right to assert and dispute the fair market value placed on the land. In April 2003, VTA adopted a resolution authorizing a condemnation proceeding to acquire the land and deposited $3,700 in an escrow account as fair market compensation and filed an eminent domain lawsuit. As a part of the proceedings, VTA transferred funds from the escrow account into a court deposit account to secure its ongoing right of possession for construction of the light rail station pending final litigation. Compensation for the taking of property and any damage was to be determined by the court or by way of settlement between SJW Land Company and VTA. A settlement was reached on November 23, 2004, regarding the compensation for the transfer of property and for damages before the lawsuit reached trial. The settlement terms included a cash payment of $9,650 and the conveyance of a parcel valued at approximately $325 to SJW Land Company. SJW Land Company recorded a condemnation gain of $3,776, net of taxes of $2,624, in connection with this proceeding.
Note 15. Non-regulated Businesses
The business activities of SJW Corp. consist primarily of its subsidiary, San Jose Water Company, a public utility regulated by the California Public Utilities Commission (CPUC) that operates within a service area approved by the CPUC. Included in total operating revenue and operating expenses are the non-regulated business activities of SJW Corp. The non-regulated businesses of SJW Corp. are comprised of operating the City of Cupertino Municipal Water Systems (CMWS), parking and lease operations of several commercial buildings and properties of SJW Land Company (SJW Land), and the sale and rental of water conditioning and purification equipment of Crystal Choice Water Service LLC (CCWS). The following tables represent the distribution of regulated and non-regulated business activities for the twelve months ended 2004, 2003 and 2002:
| | | | December 31, 2004
| |
|---|
| | | | Regulated
| | Non Regulated
| | Total
|
|---|
| Revenue | | | | $ | 157,951 | | | | 8,960 | | | | 166,911 | |
| Expenses | | | | | 135,103 | | | | 7,691 | | | | 142,794 | |
| Operating Income | | | | $ | 22,848 | | | | 1,269 | | | | 24,117 | |
| | | | December 31, 2003
| |
|---|
| | | | Regulated
| | Non Regulated
| | Total
|
|---|
| Revenue | | | | $ | 142,793 | | | | 7,661 | | | | 150,454 | |
| Expenses | | | | | 120,836 | | | | 6,423 | | | | 127,259 | |
| Operating Income | | | | $ | 21,957 | | | | 1,238 | | | | 23,195 | |
| | | | December 31, 2002
| |
|---|
| | | | Regulated
| | Non Regulated
| | Total
|
|---|
| Revenue | | | | $ | 139,835 | | | | 6,538 | | | | 146,373 | |
| Expenses | | | | | 119,606 | | | | 6,025 | | | | 125,631 | |
| Operating Income | | | | $ | 20,229 | | | | 513 | | | | 20,742 | |
Note 16. Segment Reporting
SJW Corp. is a holding company with three subsidiaries: San Jose Water Company (SJWC), a water utility operation with both regulated and non-regulated businesses, SJW Land Company and its consolidated variable interest entity, 444 West Santa Clara Street, L.P. (SJW Land), which operates parking facilities and commercial building rentals, and Crystal Choice Water Service LLC (CCWS), a business providing the sale
51
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
Note 16. Segment Reporting (Continued)
and rental of water conditioning and purification equipment. In accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information”, SJW Corp. has determined that it has two reportable business segments. The first is that of providing water utility and utility-related services to its customers, provided through the Corporation’s subsidiary, SJWC. The second segment is that of SJW Land Company.
The Corporation’s reportable segments have been determined based on information used by the chief operating decision maker. SJW Corp.’s chief operating decision maker is its President and Chief Executive Officer (CEO). The CEO reviews financial information presented on a consolidated basis that is accompanied by disaggregated information about operating revenue, net income (loss) and total assets.
The tables below set forth information relating to SJW Corp.’s reportable segments. Certain allocated assets, revenue and expenses have been included in the reportable segment amounts. Other business activity of the Corporation not included in the reportable segments is included in the “All Other” category.
| | | | For twelve months ended December 31, 2004
| |
|---|
| | | | SJWC
| | SJW Land
Company
| | All Other*
| | SJW Corp.
|
|---|
| Operating revenue | | | | $ | 161,757 | | | | 3,466 | | | | 1,688 | | | | 166,911 | |
| Operating expense | | | | | 138,188 | | | | 2,098 | | | | 2,507 | | | | 142,793 | |
| Net income | | | | | 14,733 | | | | 4,461 | | | | 592 | | | | 19,786 | |
| Depreciation and amortization | | | | | 17,787 | | | | 615 | | | | 79 | | | | 18,481 | |
| Interest expense | | | | | 9,249 | | | | 915 | | | | 6 | | | | 10,170 | |
| Income tax expense | | | | | 10,863 | | | | 787 | | | | (6 | ) | | | 11,644 | |
| Assets | | | | $ | 468,388 | | | | 39,715 | | | | 44,049 | | | | 552,152 | |
| | | | For twelve months ended December 31, 2003
(Restated)
| |
|---|
| | | | SJWC
| | SJW Land
Company
| | All Other*
| | SJW Corp.
|
|---|
| Operating revenue | | | | $ | 146,132 | | | | 3,096 | | | | 1,226 | | | | 150,454 | |
| Operating expense | | | | | 123,422 | | | | 1,944 | | | | 1,893 | | | | 127,259 | |
| Net income | | | | | 17,065 | | | | 1,010 | | | | 602 | | | | 18,677 | |
| Depreciation and amortization | | | | | 14,723 | | | | 431 | | | | 71 | | | | 15,225 | |
| Interest expense | | | | | 8,594 | | | | 407 | | | | — | | | | 9,001 | |
| Income tax expense | | | | | 10,208 | | | | 487 | | | | (172 | ) | | | 10,523 | |
| Assets | | | | $ | 450,796 | | | | 32,635 | | | | 32,813 | | | | 516,244 | |
| | | | For twelve months ended December 31, 2002
(Restated)
| |
|---|
| | | | SJWC
| | SJW Land
Company
| | All Other*
| | SJW Corp.
|
|---|
| Operating revenue | | | | $ | 143,092 | | | | 2,581 | | | | 700 | | | | 146,373 | |
| Operating expense | | | | | 122,111 | | | | 1,818 | | | | 1,702 | | | | 125,631 | |
| Net income | | | | | 13,344 | | | | 625 | | | | 263 | | | | 14,232 | |
| Depreciation and amortization | | | | | 13,769 | | | | 182 | | | | 62 | | | | 14,013 | |
| Interest expense | | | | | 7,879 | | | | 68 | | | | 74 | | | | 8,021 | |
| Income tax expense | | | | | 9,145 | | | | 521 | | | | (8 | ) | | | 9,658 | |
| Assets | | | | $ | 411,787 | | | | 17,187 | | | | 28,796 | | | | 457,770 | |
| * | | The “All Other” category includes CCWS and without regard to its subsidiaries, SJW Corp. |
52
SJW CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except share data)
Note 17. Subsequent Event
SJW Corp. adopted an Executive Special Deferral Election Plan effective January 1, 2005. The plan allows certain executives to defer a portion of their earnings each year and to realize an investment return on those funds during the deferral period. Executives have to make an election on the distribution and payment method of the deferrals before services are rendered. The company will record the investment return on the deferred funds as compensation expense once the deferrals are made.
Note 18. Unaudited Quarterly Financial Data
Summarized quarterly financial data is as follows:
| | | | 2004 Quarter Ended
| |
|---|
| | | | March
| | June
| | September
| | December
|
|---|
| Operating revenue | | | | $ | 31,063 | | | | 45,609 | | | | 52,297 | | | | 37,942 | |
| Operating income | | | | | 3,985 | | | | 7,110 | | | | 7,740 | | | | 5,282 | |
| Net income | | | | | 1,774 | | | | 4,807 | | | | 5,530 | | | | 7,675 | |
| Comprehensive income | | | | | 2,352 | | | | 4,326 | | | | 6,711 | | | | 13,322 | |
Earnings per share
|
| — Basic | | | | | 0.19 | | | | 0.53 | | | | 0.61 | | | | 0.84 | |
| — Diluted | | | | | 0.19 | | | | 0.53 | | | | 0.60 | | | | 0.83 | |
Comprehensive income per share
|
| — Basic | | | | | 0.26 | | | | 0.47 | | | | 0.74 | | | | 1.46 | |
| — Diluted | | | | | 0.26 | | | | 0.47 | | | | 0.73 | | | | 1.45 | |
Market price range of stock
|
| — High | | | | | 38.00 | | | | 37.10 | | | | 35.60 | | | | 38.90 | |
| — Low | | | | | 29.29 | | | | 30.35 | | | | 30.84 | | | | 32.90 | |
| Dividend per share | | | | | 0.25 | | | | 0.26 | | | | 0.25 | | | | 0.26 | |
| | | | 2003 Quarter Ended (Restated)
| |
|---|
| | | | March
| | June
| | September
| | December
|
|---|
| Operating revenue | | | | $ | 27,971 | | | | 38,149 | | | | 49,514 | | | | 34,820 | |
| Operating income | | | | | 4,062 | | | | 6,308 | | | | 7,938 | | | | 4,887 | |
| 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 | | | | 0.66 | | | | 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 | | | | | 0.73 | | | | 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 | |
| Dividend per share | | | | | 0.24 | | | | 0.25 | | | | 0.24 | | | | 0.24 | |
53
SJW CORP.
FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years ended December 31, 2004 and 2003
Schedule II
Description
| | | | 2004
| | 2003
|
|---|
Allowance for doubtful accounts
|
| Balance, beginning of period | | | | $ | 130,000 | | | | 120,000 | |
| Charged to expense | | | | | 227,442 | | | | 312,740 | |
| Accounts written off | | | | | (279,719 | ) | | | (349,343 | ) |
| Recoveries of accounts written off | | | | | 52,277 | | | | 46,603 | |
| Balance, end of period | | | | $ | 130,000 | | | | 130,000 | |
| Reserve for litigation and claims | | | | | | | | | | |
| Balance, beginning of period | | | | $ | 648,225 | | | | 609,292 | |
| Charged to expense | | | | | — | | | | 105,000 | |
| Revision to accrual | | | | | (123,500 | ) | | | — | |
| Payments | | | | | (82,404 | ) | | | (66,067 | ) |
| Balance, end of period | | | | $ | 442,321 | | | | 648,225 | |
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.Controls and Procedures
Evaluation of Disclosure Control and Procedures
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 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Corporation in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The Corporation believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Management’s Report on Internal Control Over Financial Reporting
SJW Corp.’s management is responsible for establishing and maintaining an adequate internal control structure over financial reporting and for an assessment of the effectiveness of internal control over financial reporting, as such items is defined in Rule 13a–15(f) under the Securities Exchange Act.
Management is required to base its assessment of the effectiveness of the Corporation’s internal control over financial reporting on a suitable, recognized control framework. Management has utilized the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to evaluate the effectiveness of internal control over financial reporting, which is a suitable framework as published by the Public Company Accounting Oversight Board (PCAOB).
The Corporation’s management has performed an assessment according to the guidelines established by COSO. Based on this assessment, management has concluded SJW Corp’s system of internal control over financial reporting as of December 31, 2004, is effective.
KPMG, LLP, the Corporation’s registered independent public accountant, has audited the financial statements included in the annual report and has issued an attestation report on managements’ assessment of internal control over financial reporting.
54
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.
Item 9B.Other Information
None.
PART III
Item 10.Directors and Executive Officers of the Registrant
The information required by this item is contained in part under the caption “Executive Officers of Registrant” in Part I of this report, and the remainder is contained in SJW Corp.’s Proxy Statement for its 2005 Annual Meeting of Shareholders to be held on April 28, 2005 (the “2005 Proxy Statement”) under the captions “Proposal No. 1 — Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance,” and is incorporated herein by reference.
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.
Corporate Governance Guidelines and Board Committee Charters
The Corporate Governance Guidelines and the charters for the board committees — the Audit Committee, Executive Committee, Executive Compensation Committee, Real Estate Committee and Nominating and Governance Committee — are available at the company’s website at http://www.sjwater.com. Shareholders may also request a free hard copy of the Corporate Governance Guidelines and the charters from the following address and phone number:
SJW Corp.
374 West Santa Clara Street
San Jose CA 95196
Attn: Corporate Secretary
Phone: 800-250-5147
Item 11.Executive Compensation
The information required by this item is contained in the 2005 Proxy Statement under the captions “Compensation of Directors,” “Executive Compensation and Related Information,” 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 2005 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 2005 Proxy Statement under the caption “Certain Relationships and Related Transactions,” and is incorporated herein by reference.
55
Item 14.Principal Accountant Fees and Services
The information required by this item is contained in the 2005 Proxy Statement under the caption “Principal Independent Accountant Fees and Services,” and is incorporated herein by reference.
PART IV
Item 15.Exhibits and Financial Statement Schedules
SJW Corp. filed a current report on Form 8-K with the Securities and Exchange Commission on November 1, 2004 to furnish its press release to announce the financial results for the third quarter ended September 30, 2004 under Item 12 thereof.
On December 13, 2004, SJW Corp. filed Form 8-K with the Securities and Exchange Commission to announce its entry into a Material Definitive Agreement under Item 1 thereof.
| | | | Page
|
|---|
| Report of Independent Accounting Firm | | | | | 27 | |
| Report of Internal Controller over Financial Reporting | | | | | 28 | |
| Consolidated Balance Sheets as of December 31, 2004 and 2003 | | | | | 29 | |
Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 2004, 2003 and 2002 | | | | | 31 | |
Consolidated Statements of Changes in Shareholders’ Equity
for the years ended December 31, 2004, 2003 and 2002 | | | | | 32 | |
Consolidated Statements of Cash Flows
for the years ended December 31, 2004, 2003 and 2002 | | | | | 33 | |
| Notes to Consolidated Financial Statements | | | | | 34 | |
| (2) | | Financial Statement Schedule |
Valuation and Qualifying Accounts and Reserves,
Years ended December 31, 2004 and 2003 | | | | | 54 | |
All other schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
| (3) | | Exhibits required to be filed by Item 601 of Regulation S-K |
See Exhibit Index located immediately following paragraph (b) of this Item 15.
The exhibits filed herewith are attached hereto (except as noted) and those indicated on the Exhibit Index which are not filed herewith were previously filed with the Securities and Exchange Commission as indicated.
56
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 2.1 to Form 10-K March 12, 2004. S.E.C. File No. 1-8966. |
| 3 | | | | Articles of Incorporation and By-Laws: |
| 3.1 | | | | Restated Articles of Incorporation and By-Laws of SJW Corp., defining the rights of holders of the equity securities of SJW Corp. |
| 3.2 | | | | Certificate of Amendment of SJW Corp. amending the restated Articles of Incorporation. (1) |
| 3.3 | | | | By-Laws of SJW Corp. as amended. (1) |
| 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. |
| 10.2 | | | | Resolution for Directors’ Retirement Plan adopted by SJW Corp. Board of Directors as amended on September 22, 1999. Filed as an Exhibit to 10Q for the period ending September 30, 1999. S.E.C. File No. 1-8966. (2) |
| 10.3 | | | | Resolution for Directors’ Retirement Plan adopted by San Jose Water Company’s Board of Directors as amended on September 22, 1999. Filed as an Exhibit to 10-Q for the period ending September 30, 1999. S.E.C. File No. 1-8966. (2) |
| 10.4 | | | | Resolution for Directors’ Retirement Plan adopted by SJW Land Company Board of Directors on September 22, 1999. Filed as an Exhibit to 10-Q for the period ending September 30, 1999. S.E.C. File No. 1-8966. (2) |
| 10.5 | | | | 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) |
| 10.6 | | | | Limited Partnership Agreement of 444 West Santa Clara Street, L. P. executed between SJW Land Company and Toeniskoetter & Breeding, Inc. Development. Filed as an Exhibit to 10-Q for the period ending September 30, 1999. S.E.C. File No. 1-8966. |
| 10.7 | | | | 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) |
| 10.8 | | | | 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) |
| 10.9 | | | | 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) |
| 10.10 | | | | 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) |
57
Exhibit No.
| | | | Description
|
|---|
| 10.11 | | | | 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) |
| 10.12 | | | | 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) |
| 10.13 | | | | 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) |
| 10.14 | | | | Form of Directors Deferred Restricted Stock Program as adopted by SJW Corp. Board of Directors on July 29, 2003. Filed as an Exhibit to 10-Q for the period ending September 30, 2003. S.E.C. File No. 1-8966. (2) |
| 10.15 | | | | 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 10-Q for the period ending September 30, 2003. S.E.C. File No. 1-8966. (2) |
| 10.16 | | | | First Amendment dated March 1, 2004 to San Jose Water Company’s Executive Supplemental Retirement Plan adopted by the San Jose Water Company Board of Directors. Filed as an Exhibit to Form 10-Q for the period ending March 31, 2004. SEC File No. 1-8966. (2) |
| 10.17 | | | | San Jose Water Company Special Deferral Election Plan adopted by San Jose Water Company Board of Directors on December 9, 2004. Filed as Exhibit 99.1 of Form 8-K on December 13, 2004. SEC File No. 1-8966. (2) |
| 10.18 | | | | First Amendment to the San Jose Water Company Special Deferral Election Plan adopted by the Board of Directors January 27, 2005. (1) (2) |
| 21.1 | | | | Subsidiaries of SJW Corp. filed as an Exhibit to the Annual Report on Form 10-K for the year ended December 31, 2002. SEC File No. 1-8966. |
| 23 | | | | Consent of Independent Registered Public Accounting Firm. (1) |
| 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.
58
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: | | | | By | | | | | | | | | | | | | | | | |
| | | | | 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 27, 2005 | | | | By | | | | | | | | | | | | | | | | |
| | | | | W. RICHARD ROTH, President,
Chief Executive Officer and Member,
Board of Directors | | | | | | | | | | | | | | | | |
| Date: January 27, 2005 | | | | By | | | | | | | | | | | | | | | | |
| | | | | ANGELA YIP, Chief Financial Officer | | | | | | | | | | | | | | | | |
| Date: January 27, 2005 | | | | By | | | | | | | | | | | | | | | | |
| | | | | VICTOR K. WONG, Controller
(Chief Accounting Officer) | | | | | | | | | | | | | | | | |
| Date: January 27, 2005 | | | | By | | | | | | | | | | | | | | | | |
| | | | | MARK L. CALI, Member,
Board of Directors | | | | | | | | | | | | | | | | |
| Date: January 27, 2005 | | | | By | | | | | | | | | | | | | | | | |
| | | | | J. PHILIP DINAPOLI, Member,
Board of Directors | | | | | | | | | | | | | | | | |
| Date: January 27, 2005 | | | | By | | | | | | | | | | | | | | | | |
| | | | | DREW GIBSON, Member,
Board of Directors | | | | | | | | | | | | | | | | |
| Date: January 27, 2005 | | | | By | | | | | | | | | | | | | | | | |
| | | | | DOUGLAS R. KING, Member,
Board of Directors | | | | | | | | | | | | | | | | |
| Date: January 27, 2005 | | | | By | | | | | | | | | | | | | | | | |
| | | | | GEORGE E. MOSS, Member,
Board of Directors | | | | | | | | | | | | | | | | |
| Date: January 27, 2005 | | | | By | | | | | | | | | | | | | | | | |
| | | | | CHARLES J. TOENISKOETTER, Member,
Board of Directors | | | | | | | | | | | | | | | | |
| Date: January 27, 2005 | | | | By | | | | | | | | | | | | | | | | |
| | | | | FREDERICK ULRICH, Member,
Board of Directors | | | | | | | | | | | | | | | | |
59
