SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2002
-----------------------------------------------
Commission file number 1-8966
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SJW Corp.
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(Exact name of registrant as specified in its charter)
California 77-0066628
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
374 West Santa Clara Street, San Jose, CA 95196
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(Address of principal executive offices) (Zip Code)
408-279-7800
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(Registrant's telephone number, including area code)
Not Applicable
- -----------------------------------------------------------------
(Former name, former address and former fiscal year changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Common shares outstanding as of November 12, 2002 and as of the
date of this report are 3,045,147.
<page>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
(In thousands, except share and per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2002 2001 2002 2001
---------------------------------------
OPERATING REVENUE $46,153 44,182 $112,567 104,791
OPERATING EXPENSES:
Operation:
Purchased water 12,868 11,625 29,174 26,593
Power 2,308 2,196 5,496 4,971
Pump taxes 6,691 7,165 15,405 16,145
Other operating
expenses 6,603 5,474 18,821 16,777
Maintenance 1,836 1,830 5,811 5,218
Property taxes and other
nonincome taxes 1,015 1,111 3,192 3,272
Depreciation and
amortization 3,504 3,319 10,507 9,928
Income taxes 3,931 3,515 7,672 6,013
---------------------------------------
Total operating
expenses 38,756 36,235 96,078 88,917
---------------------------------------
OPERATING INCOME 7,397 7,947 16,489 15,874
Other income 158 166 579 530
Dividend income 308 307 924 920
Interest expense and
other (2,087) (2,025) (6,476) (6,081)
---------------------------------------
NET INCOME $ 5,776 6,395 $11,516 11,243
=======================================
Other comprehensive
income (loss):
Unrealized gain
(loss)on investment 363 1,485 (242) -
Income taxes related
to other comprehensive
income (loss) ( 149) (609) 99 -
---------------------------------------
Other comprehensive
income (loss), net 214 876 (143) -
---------------------------------------
COMPREHENSIVE INCOME $ 5,990 7,271 $11,373 11,243
=======================================
BASIC EARNINGS PER SHARE $ 1.90 2.10 $ 3.78 3.69
=======================================
COMPREHENSIVE INCOME
PER SHARE $ 1.97 2.39 $ 3.73 3.69
=======================================
DIVIDENDS PER SHARE $ 0.69 0.65 $ 2.07 1.92
=======================================
WEIGHTED AVERAGE
SHARE OUTSTANDING 3,045,147 3,045,147 3,045,147 3,045,147
See Accompanying Notes to Condensed Consolidated Financial
Statements.
</page>
<page>
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
SEPTEMBER 30 DECEMBER 31
ASSETS 2002 2001
- ---------------------------------------------------------------
UTILITY PLANT $539,447 $507,227
Less accumulated depreciation
and amortization 159,675 149,721
-----------------------
Net utility plant 379,772 357,506
NONUTILITY PROPERTY 11,940 11,666
Less accumulated depreciation 1,533 1,357
----------------------
Net nonutility plant 10,407 10,309
CURRENT ASSETS:
Cash and equivalents 638 5,021
Accounts receivable and accrued
utility revenue 23,033 14,098
Prepaid expenses and other 1,893 1,308
----------------------
Total current assets 25,564 20,427
OTHER ASSETS:
Investment in California Water
Service Group 28,082 28,324
Investment in joint venture 1,173 1,199
Unamortized debt issuance and
reacquisition costs 3,535 3,658
Goodwill 1,744 1,744
Regulatory assets 5,642 5,567
Other 3,572 2,283
----------------------
Total other assets 43,748 42,775
----------------------
$459,491 $431,017
======================
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common stock $ 9,516 $ 9,516
Additional paid-in capital 12,357 12,357
Retained earnings 127,628 122,415
Accumulated other comprehensive
income 4,922 5,066
-----------------------
Shareholders' equity 154,423 149,354
Long-term debt 110,000 110,000
-----------------------
Total capitalization 264,423 259,354
CURRENT LIABILITIES:
Line of credit 10,050 11,500
Accrued pump taxes and
purchased water 6,713 3,091
Accounts payable 5,638 422
Accrued interest 2,124 3,136
Accrued taxes 4,574 1,182
Other current liabilities 6,318 4,828
-----------------------
Total current liabilities 35,417 24,159
DEFERRED INCOME TAXES AND CREDITS 27,026 26,706
ADVANCES FOR AND CONTRIBUTIONS IN
AID OF CONSTRUCTION 125,253 114,519
OTHER NONCURRENT LIABILITIES 7,372 6,279
-----------------------
$459,491 $431,017
=======================
See Accompanying Notes to Condensed Consolidated Financial
Statements.
</page>
<page>
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30
2002 2001
- -----------------------------------------------------------
OPERATING ACTIVITIES:
Net income $11,516 $11,243
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 10,507 9,928
Deferred income taxes and credits 320 2,040
Changes in operating assets
and liabilities:
Accounts receivable and accrued
utility revenue (8,935) (8,582)
Prepaid expenses and other (585) (267)
Accounts payable and other current
liabilities 6,706 2,336
Accrued pump taxes and purchased
water 3,622 3,763
Accrued taxes 3,392 5,769
Accrued interest (1,012) (732)
Other changes, net 354 (470)
-----------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 25,885 25,028
-----------------
INVESTING ACTIVITIES:
Additions to utility plant (33,299) (39,701)
Additions to nonutility property (335) (249)
Cost to retire utility plant, net
of salvage (672) (479)
Investment in affiliate (8) 179
------------------
NET CASH USED IN INVESTING ACTIVITIES (34,314) (40,250)
------------------
FINANCING ACTIVITIES:
Borrowings from line of credit,
net of repayments (1,450) (11,200)
Dividends paid (6,303) (5,847)
Advances and contributions in
aid of construction 12,987 14,794
Refunds of advances (1,188) (1,210)
Proceeds from issuance of long-term
debt - 20,000
------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,046 16,537
------------------
NET CHANGE IN CASH AND EQUIVALENTS $(4,383) $ 1,315
------------------
CASH AND EQUIVALENTS, BEGINNING OF
PERIOD 5,021 783
------------------
CASH AND EQUIVALENTS, END OF PERIOD $ 638 $ 2,098
==================
Cash paid during period for:
Interest $ 6,754 $ 6,686
Income taxes 4,700 -
See Accompanying Notes to Condensed Consolidated Financial
Statements.
</page>
<page>
SJW CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2002
Note 1. General
- ----------------
In the opinion of SJW Corp., the accompanying unaudited condensed
consolidated financial statements contain all adjustments,
consisting only of normal recurring adjustments, necessary for
the fair presentation of the results for the interim periods.
The Notes to Consolidated Financial Statements in SJW Corp.'s
2001 Annual Report on Form 10-K should be read with the
accompanying condensed consolidated financial statements.
Basic earnings per share and comprehensive income per share are
calculated using income available to common shareholders and
comprehensive income, respectively, divided by the weighted
average number of shares outstanding during the year. SJW Corp.
has no dilutive securities, and accordingly, diluted earnings per
share are not shown.
SJW Corp. and its subsidiaries operate predominantly in one
reportable business segment providing water utility services.
Nonutility revenue, assets and net income do not have a material
effect on the corporation's financial condition and results of
operation.
Note 2. Long-Term Incentive Plan
- --------------------------------
At the 2002 Annual Meeting of Shareholders of SJW Corp. held on
April 18, 2002, the shareholders approved the adoption of the
Long-Term Incentive Plan (Incentive Plan) under which 300,000
shares of common stock will initially be reserved for issuance.
The Incentive Plan will allow SJW Corp. to provide key employees,
including officers, the opportunity to acquire a meaningful
equity interest in the corporation as an incentive for them to
remain employed by SJW Corp. and its subsidiaries. In no event
may any one participant in the Incentive Plan receive awards
under the Incentive Plan in any calendar year covering an
aggregate of more than 100,000 shares of the common stock.
Additionally, awards granted under the Incentive Plan may be
conditioned upon the attainment of specified performance goals.
The types of awards included in the Incentive Plan are stock
options, dividend units, performance shares, rights to acquire
restricted stock and stock bonuses. As of September 30, 2002, no
award has been granted under the Incentive Plan.
Note 3. Goodwill
- ----------------
SJW Corp. adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 142 "Goodwill and Other
Intangible Assets" regarding goodwill amortization effective
January 1, 2002. Accordingly, the company no longer amortizes
goodwill from business acquisitions. On a pro-forma basis, if
the company had applied SFAS No. 142 during the corresponding six
months period a year ago, amortization of goodwill and other
intangible assets would be as follows:
Nine months Nine months
ended September 30 ended September 30
Dollars in thousands 2002 2001
- ----------------------------------------------------------------
Reported net income $11,516 $11,243
Add: Goodwill
amortization, net of tax - 42
---------------------------
Adjusted net income $11,516 $11,285
===========================
Basic earnings per share,
as reported $3.78 $3.69
Basic earnings per share,
adjusted $3.78 $3.71
Note 4. Impact of Recent Accounting Pronouncements
- ---------------------------------------------------
In August 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which applies to legal obligations that are
associated with the retirement of long-lived assets and the
associated asset retirement costs. The statement is effective
for financial statements issued for fiscal years beginning after
June 15, 2002. SJW Corp. does not anticipate that the adoption
of SFAS No. 143 will have a material effect on SJW Corp.'s
financial condition and results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-lived Assets". This statement
addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and superceded SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-
lived Assets to be Disposed Of". SJW Corp. adopted SFAS No. 144
beginning January 1, 2002. The adoption of SFAS No. 144 did not
have a material impact on SJW Corp.'s financial condition and
results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections". Among other provisions, SFAS No. 145
rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt". Accordingly, gains or losses from
extinguishment of debt shall not be reported as extraordinary
items unless the extinguishment qualifies as an extraordinary
item under the criteria of APB No. 30. Gains or losses from
extinguishment of debt that do not meet the criteria of APB No.
30 should be reclassified to income from continuing operations in
all prior periods presented. SFAS No. 145 is effective for
fiscal years beginning after May 15, 2002. SJW Corp. does not
anticipate that the adoption of SFAS No. 145 will have a material
effect on SJW Corp.'s financial condition and results of
operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The standard
requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the
date of a commitment to an exit or disposal plan. Examples of
costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a
restructuring, discontinued operations, a plant closing, or other
exit or disposal activities. The provisions of this statement
are effective for exit and disposal activities that are initiated
by a company after December 31, 2002. SJW Corp. does not
anticipate that the adoption of SFAS No. 146 will have a material
effect on SJW Corp.'s financial condition and results of
operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements within the
meaning of the federal securities laws relating to future events
and financial performance of SJW Corp. and its subsidiaries.
Such forward-looking statements are identified by words including
"expect", "estimate", "anticipate" and similar expressions. SJW
Corp.'s actual results could differ materially from those
discussed in such forward-looking statements.
General:
- -------
SJW Corp. was incorporated in California on February 8, 1985.
SJW Corp. is a holding company with three subsidiaries.
San Jose Water Company, a wholly owned subsidiary, with
headquarters at 374 West Santa Clara Street, San Jose, California
95196, was originally incorporated under the laws of the State of
California in 1866. The company was later reorganized and
reincorporated as the San Jose Water Works. San Jose Water Works
was reincorporated in 1985 as San Jose Water Company, with SJW
Corp. as the parent holding company. San Jose Water Company is a
public utility in the business of providing water service to a
population of approximately 1,000,000 people in an area
comprising about 138 square miles in the metropolitan San Jose
area. San Jose Water Company's web site can be accessed via the
Internet at http://www.sjwater.com.
The principal business of San Jose Water Company consists of the
production, purchase, storage, purification, distribution and
retail sale of water. San Jose Water Company provides water
service to customers in portions of the cities of Cupertino and
San Jose and in the cities of Campbell, Monte Sereno, Saratoga
and the Town of Los Gatos, and adjacent unincorporated territory,
all in the County of Santa Clara in the State of California. It
distributes water to customers in accordance with accepted water
utility methods, which include pumping from storage and gravity
feed from high elevation reservoirs.
SJW Land Company, a wholly owned subsidiary, was incorporated in
1985. SJW Land Company owns and operates parking facilities
adjacent to the company's headquarters and the San Jose Compaq
Center. SJW Land Company also owns commercial buildings and
other undeveloped land in the San Jose Metropolitan area, and a
70% limited partnership interest in 444 West Santa Clara Street,
L.P.
Crystal Choice Water Service LLC, a 75% owned limited liability
subsidiary formed in January 2001, engages in the sale and rental
of water conditioning and purification equipment.
SJW Corp. also owns 1,099,952 shares of California Water Service
Group.
Critical Accounting Policies:
- -----------------------------
SJW Corp. has identified accounting policies below as the
policies critical to the business operations and the
understanding of the results of operations. The preparation of
financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, and revenues and expenses. SJW Corp. bases its
estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances. The impact and any associated risks related to
these policies on our business operations is discussed throughout
Management's Discussion and Analysis of Financial Condition and
Results of Operations where such policies affect our reported and
expected financial results. Our critical accounting policies are
as follows:
Recognition of balancing account
The California Public Utilities Commission (CPUC) establishes a
balancing account mechanism within its regulatory regime. A
separate balancing account must be maintained for each offset
expense item (e.g. purchased water, purchased power and pump
tax). The purpose of a balancing account is to track the under-
collection or over-collection associated with expense changes and
the revenue authorized by the CPUC to offset those expense
changes. Since balances are being tracked and have to be
approved by the CPUC before they can be incorporated into rates,
San Jose Water Company has not recognized the balancing account
in its consolidated financial statements. Had the balancing
account under-collection been recognized in San Jose Water
Company's financial statements, San Jose Water Company's earnings
would be increased by the amount of balancing account revenue
under-collected. At September 30, 2002, the balancing account
had a net under-collected balance of $562,000.
Accrued unbilled revenue
San Jose Water Company reads its customer's meters on a bi-
monthly basis and records its revenue based on its meter reading
results. Revenues from the meter reading date to the end of the
accounting period are estimated based on historical usage
patterns, production records and the effective tariff rates. The
estimate of the unbilled revenue is a management estimate
utilizing certain sets of assumptions and conditions which
include the number of days between meter reads for each billing
cycle, the customers' consumption changes, and the company's
experiences in unaccounted-for water. Actual results could
differ from those estimates, which would result in operating
revenue being adjusted in the period that the revision to our
estimates is determined.
Recognition of regulatory assets and liabilities
Generally accepted accounting principles for water utilities
include the recognition of regulatory assets and liabilities as
permitted by SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation". In accordance with SFAS No. 71, San Jose
Water Company records deferred costs and credits on the balance
sheet as regulatory assets and liabilities when it is probable
that these costs and credits will be recovered in the ratemaking
process in a period different from when the costs and credits
were incurred. Accounting for such costs and credits is based on
management's judgments that it is probable that these costs will
be recoverable in the future revenue of the company through the
ratemaking process. The regulatory assets and liabilities
recorded by San Jose Water Company primarily relate to the
recognition of deferred income taxes for ratemaking versus tax
accounting purposes. The disallowance of any asset in future
ratemaking purposes, including the deferred regulatory assets,
would require San Jose Water Company to immediately recognize the
impact of the costs for financial reporting purposes.
Liquidity and Capital Resources:
- -------------------------------
The water utility business is highly seasonal in nature. Customer
consumption demand during summer months could significantly
exceed that of winter months. Operating revenue, accounts
receivable and unbilled revenue increase as customer consumption
increases. The higher accounts receivable balance as of
September 30, 2002 in comparison to December 31, 2001 was due to
the seasonal increase of revenue during summer months.
Historically, San Jose Water Company's write-offs for
uncollectible accounts represent less than 1% of its total
revenue. Management believes it can continue to collect its
accounts receivable balances at its historical collection rate.
Accounts payable and current liabilities increase during the
summer months due to increased water production volume to meet
higher customer demand and timing of payment of certain expenses.
Please refer to "Sources of Capital" for further discussion.
Starting in 1997, San Jose Water Company began a four-phased
Infrastructure Study establishing a systematic approach to
replace its utility facilities. Phase IV was completed in July of
2002. Phase I and II of the Infrastructure Study analyzed the
company's pipes and mains. Phase III and IV examined all other
utility facilities. The Infrastructure Study will be used as a
guide for future capital improvement programs, and serve as the
master plan for the company's replacement program for the next 20
years.
San Jose Water Company's capital expenditures are incurred in
connection with normal upgrading and expansion of existing
facilities and to comply with environmental regulations. San
Jose Water Company expects to incur approximately $140,000,000,
exclusive of customer contributions and advances, in capital
expenditures over the next five years. The company's actual
capital expenditures may vary from its projections due to changes
in the expected demand for services, weather patterns, actions by
governmental agencies and general economic conditions. Total
additions to utility plant normally exceed company-financed
additions by several million dollars because certain new
facilities are constructed using advances from developers and
contributions in aid of construction.
A substantial portion of San Jose Water Company's distribution
system was constructed during the period from 1945 to 1980.
Expenditure levels for renewal and modernization of this part of
the system will grow at an increasing rate as these components
reach the end of their useful lives. In most cases, replacement
cost will significantly exceed the original installation cost of
the retired assets due to increases in the costs of goods and
services.
As of September 30, 2002, SJW Corp. has invested $287,000 in
Crystal Choice Water Service LLC for its 75% share of capital
investment. The capital is invested primarily in rental
equipment used by the LLC in its rental operation.
Sources of Capital:
- ------------------
San Jose Water Company's ability to finance future construction
programs and sustain dividend payments depends on its ability to
attract external financing and maintain or increase internally
generated funds. The level of future earnings and the related
cash flow from operations is dependent, in large part, upon the
timing and outcome of regulatory proceedings.
San Jose Water Company has outstanding $110,000,000 of unsecured
senior notes as of September 30, 2002. The senior note
agreements of San Jose Water Company generally have terms and
conditions that restrict the company from issuing additional
funded debt if (1) the funded debt would exceed 66-2/3% of total
capitalization, and (2) net income available for interest charges
for the trailing twelve calendar month period would be less than
175% of interest charges.
San Jose Water Company's financing activity is designed to
achieve a capital structure consistent with regulatory guidelines
of approximately 50% debt and 50% equity. As of September 30,
2002, San Jose Water Company's funded debt was 46.5% of total
capitalization and the net income for preceding twelve months was
437% of interest charges.
SJW Corp. and its subsidiaries have unsecured lines of credit
available allowing aggregate short-term borrowings of up to
$30,000,000 at rates that approximate the bank's prime or
reference rate. At September 30, 2002, SJW Corp. and its
subsidiaries had available unused short-term bank lines of credit
of $19,950,000. Cost of borrowing averaged 4.10% for the first
nine months of 2002.
Results of Operations:
- ---------------------
Overview
SJW Corp.'s consolidated net income for the third quarter of 2002
was $5,776,000, a decrease of $619,000 or 10% from $6,395,000 in
the third quarter of 2001. Nine months earnings was $11,516,000,
an increase of $273,000 or 2% from $11,243,000 for the same
period in 2001.
Operating Revenue
- -----------------
Three months ended Nine months ended
Consolidated Operating September 30 September 30
Revenue (in thousands) 2002 2001 2002 2001
- ----------------------------------------------------------------
San Jose Water Company $45,660 $43,778 $110,720 $103,365
SJW Land Company 308 333 1,328 1,273
Crystal Choice
Water Service 185 71 519 153
------------------ -------------------
$46,153 $44,182 $112,567 $104,791
================== ===================
Quarterly operating revenue was $46,153,000, or 4% increase over
the $44,182,000 for the same quarter in 2001 due to two rate
increases in the period from January through July 2002. The
change in consolidated operating revenue from the same period in
2001 was due to the following factors:
Three months ended Nine months ended
Consolidated Operating Sept 30, 2002 vs 2001 Sept 30, 2002 vs 2001
Revenue (in thousands) Increase/(decrease) Increase/(decrease)
- -----------------------------------------------------------------
Utility:
Consumption changes $ 192 - $(842) (1%)
New customers increase 71 - 71 -
Rate increases 1,619 4% 8,126 8%
Parking and rental (25) - 55 -
Crystal Choice Water
Service 114 - 366 -
--------------------------------------
$1,971 4% $7,776 7%
======================================
Operating Expenses
- ------------------
Consolidated Operating
Expense Excluding Three months ended Nine months ended
Income Taxes September 30 September 30
(in thousands) 2002 2001 2002 2001
- -----------------------------------------------------------------
San Jose Water Company $34,209 $32,248 $86,654 $80,440
SJW Land Company 147 156 501 455
Crystal Choice Water Service 231 152 775 539
SJW Corp. 238 164 476 1,470
-------------------------------------
$34,825 $32,720 $88,406 $82,904
=====================================
The change in consolidated operating expense, excluding income
taxes, from the same period in 2001 was due to the following:
Consolidated Operating Three months ended Nine months ended
Expense Excluding September 30 September 30
Income Taxes 2002 vs 2001 2002 vs 2001
(in thousands) Increase/(decrease) Increase/(decrease)
- ----------------------------------------------------------------
Production costs:
Increased surface
water supply $ (258) - $ (91) -
Increase (decrease) in
usage and new customers 473 1% (422) -
Pump tax and purchased
water price increase 352 1% 1,844 2%
Energy price increase 314 1% 1,035 1%
------------------------------------
Total production costs 881 3% 2,366 3%
Other operating expense 1,129 3% 2,044 2%
Maintenance 6 - 593 1%
Property taxes and other
nonincome taxes (96) - (80) -
Depreciation and
amortization 185 - 579 1%
-------------------------------------
$2,105 6% $5,502 7%
=====================================
For the three months ended September 30, 2002, the increase in
production costs was primarily due to an increase in Santa Clara
Valley Water District (SCVWD) water production rates (pump tax
and purchased water) in July 2002, energy costs increase and a
slightly higher customer demand. For the nine months ended
September 30, 2002, the increase in production costs was
primarily due to similar reasons as explained above. Water
production, however, was slightly below the nine months reporting
period in 2001, but was consistent with changes in customer
consumption. Additional energy costs were also incurred due to
the scheduled maintenance of a SCVWD treatment plant, altering
the company's distribution mix and optimal pumping pattern for
2002.
San Jose Water Company's water supply is obtained from wells,
surface run-off and diversion and by purchases from the SCVWD.
Surface water supply is the least expensive source of water and
the availability of a slightly higher surface water supply
reduced water production costs in the third quarter of 2002.
The change in San Jose Water Company's source of supply mix was
as follows:
Three months ended Nine months ended
2002 vs. 2001 2002 vs. 2001
Increase/(decrease) Increase/(decrease)
------------------------------------------
(Million gallons)
Purchased water 986 6% 1,033 2%
Ground water (657) (4%) (1,494) (3%)
Surface water 196 1% 46 -
Reclaimed water 22 - 7 -
----------------------------------------
547 3% (408) (1%)
========================================
The changes in the source of supply mix were consistent with the
changes in the water production costs.
The increase in other operating expenses, excluding income taxes
and production costs for the third quarter of 2002 in comparison
to the third quarter of 2001, was due to increases in pension
cost accruals as a result of a decline in market value of
retirement trust assets, depreciation expense on added utility
plant, additional professional fees, higher liability insurance,
increase in medical and workers' compensation insurance costs and
an increase in salaries and wages in accordance with bargaining
unit wage escalation and additional new hires after the
termination of the proposed merger of SJW Corp. with American
Water Works Company, Inc. (American Water) on March 1, 2001.
Operating expense increased for the nine months ended September
30, 2002 in comparison to the same period, for the similar
reasons explained above. However, the operating expense increase
was partially offset by approximately $900,000 of administration
and compensation costs incurred, in the first quarter of 2001, in
conjunction with the above-mentioned merger effort.
Income tax expense increased $416,000, or 12%, in comparison to
the third quarter of 2001 due to higher earnings in 2002 and the
tax benefits associated with certain merger related expenses in
2001. The effective income tax rates for the third quarter of
2002 and 2001 approximated 40% and 35%, respectively.
Interest expense increased $62,000, or 3%, due to issuance of
Series F senior notes in September 2001, partially offset by
lower short term borrowing in the quarter ended September 30,
2002.
Since the water business is highly seasonal in nature, a
comparison of the revenue and expense of the current quarter with
the immediately preceding quarter would not be meaningful.
Average usage per metered customer for the third quarter
increased slightly while average usage per metered customer for
the nine months of 2002 decreased 1% from the same period in
2001.
The change in other comprehensive income was primarily due to the
changes in market value of investment in California Water Service
Group. Other comprehensive income was $214,000 for the three
months ended September 30, 2002. However, there was an other
comprehensive loss for the nine months ended September 30, 2002
of $143,000.
Factors That May Affect Future Results
Medical insurance cost increased 15% in 2002. In 2002, pension
accruals increased $1,270,000 on an annual basis primarily due to
the decline in valuation of the retirement plan portfolio in
2001. Market conditions, not changes in operating risk or loss
experience, was the sole reason for the average liability
insurance cost increase of 49% in 2002 after adjustments in self-
insured retentions. Medical, liability and pension expenses are
expected to continue to have similar increases in 2003.
To the extent that San Jose Water Company has to pump water
during peak periods to satisfy customer demand when imported
water is not available, higher energy cost will be incurred.
Currently, the CPUC has no established procedure for water
utilities to recover the additional costs incurred due to such
unanticipated changes in water supply mix. There can be no
assurance that such costs will be recovered in full or in part.
On October 8, 2002, SJW Land Company, a wholly owned subsidiary
of SJW Corp., entered into an agreement with the Santa Clara
Valley Water District (SCVWD) whereby SJW Land Company will sell
to the SCVWD the San Tomas station, a nonutility property, at a
contract price of $5,400,000. The contract calls for a closing
date of October 31, 2002 with two sixty-day extensions, which
expire in February of 2003. When executed, the sale of the
nonutility property will have a positive financial impact on SJW
Corp.'s earnings.
In January, 2002 SJW Land Company entered into an Agreement for
Possession and Use with the Valley Transportation Agency (VTA)
whereby SJW Land Company has granted VTA an irrevocable right to
possession and use of 1.23 acres of the Company's parking lot
property for the development of a light rail station. VTA has
adopted a resolution authorizing a condemnation proceeding to
acquire the land and has deposited $3.7 million in an escrow
account as fair market compensation. SJW Land Company waived the
right to challenge VTA's possession and use in any subsequent
eminent domain proceeding but reserved the right to assert, and
has disputed the fair market value placed on the land. According
to the terms of the Agreement, if a settlement is not reached
within three months of the execution of the Agreement, VTA can
file an eminent domain complaint to acquire title to the parking
lot property. VTA has not filed a complaint and SJW Land Company
continues to negotiate in good faith with VTA over the fair
market value. This transaction will be booked and is expected to
result in an increase to net income, if and when the compensation
issue is settled or a final court order is rendered.
Water Supply & Energy Resources
- -------------------------------
Groundwater in 2002 remained comparable to the 30-year normal
level. On November 7, 2002, the SCVWD's ten reservoirs were
29.2% full with 49,490 acre-feet of water in storage. The
rainfall in the winter of 2002 was slightly below average. San
Jose Water Company believes that its various sources of water
supply are sufficient to meet customer demand for the remainder
of the year. Surface water is a less costly source of water and
its availability significantly impacts the results of operations.
The pumps and motors at San Jose Water Company's groundwater
production facilities are propelled by electrical power. Over the
last few years, San Jose Water Company has installed standby
power generators at eighteen of its strategic water production
sites. In addition, the commercial office and operations control
centers are equipped with standby generators that allow critical
distribution and customer service operations to continue during a
power outage. The SCVWD informed San Jose Water Company that its
filter plants, which deliver imported water to the San Jose Water
Company, are also equipped with standby generators. In the event
of a power outage, San Jose Water Company believes it will be
able to prevent an interruption of service to customers for a
limited period by pumping water with its standby generators and
by using the imported water from SCVWD.
San Jose Water Company withdrew its energy provider's real-time
pricing (RTP) program effective May, 2002. Benefits associated
with pricing electricity on an hourly basis under the RTP
experimental schedule were no longer available in the energy
shortage environment in California. Utilizing its computer
system, San Jose Water Company continues to pump efficiently
during on-peak, partial-peak and off-peak hours under
conventional time of use schedules. However, with the loss of the
once less expensive RTP pricing schedule and the change in
pumping mix due to the scheduled maintenance of the SCVWD
treatment plant, San Jose Water Company faces uncertainty in
containing its energy costs.
Security Issues
- ---------------
San Jose Water Company has begun the implementation of 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 and various governmental and law enforcement agencies.
San Jose Water Company is in the process of conducting a system-
wide vulnerability assessment in compliance with federal
regulations imposed on all water utilities. This assessment is
required to be completed by March 31, 2003. San Jose Water
Company has also actively participated in the security
vulnerability assessment training offered by the American Water
Works Association Research Foundation and the Environmental
Protection Agency.
The federal government provides grants to private and public
water utility systems for conducting the vulnerability
assessment. San Jose Water Company will actively participate in
the process to obtain reimbursement of the associated costs in
conducting the study.
Regulatory Affairs
- ------------------
Almost all the operating revenue of San Jose Water Company
results from the sale of water at rates authorized by the CPUC.
The CPUC sets rates that are intended to provide revenue
sufficient to recover operating expenses and produce a reasonable
return on common equity. The company's most recent rate
decision, approved in April 2001, authorized a return on common
equity in 2001, 2002 and 2003 of 9.95%. This is within the range
of recent rates of return authorized by the CPUC for water
utilities. San Jose Water Company received a 3% step rate
increase on January 1, 2002, and a 1% rate increase on July 1,
2002 to offset increases charged to the company by SCVWD for
purchased water and pump tax that became effective July 1, 2002.
Pursuant to Section 792.5 of the California Public Utilities
Code, a balancing account is to be kept for all expense items for
which revenue offsets have been authorized. A separate balancing
account must be maintained for each offset expense item (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. At
September 30, 2002, the balancing account had a net under-
collected balance of $562,000, of which $373,000 was accrued
prior to November 29, 2001.
On November 29, 2001, the CPUC issued Resolution W-4294
(Resolution) implementing significant changes in the long-
established offset rate increase and balancing account procedures
of water utilities, which could have a significant impact on the
risk profile of the industry. Specifically, the Resolution
provides that (1) the CPUC will open an Order Instituting
Rulemaking (OIR) to evaluate existing balancing account and
offset rate practices and policies, (2) all water companies with
existing balancing accounts shall, effective as of the date of
the Resolution, suspend such balancing accounts pending the
outcome of the OIR, and (3) water utilities can request future
offset rate increases provided they pass a pro-forma summary of
earnings test.
On August 29, 2002, the CPUC issued a draft OIR decision
proposing revisions to the procedures for recovery of balancing
account balances existing prior to November 29, 2001. Pursuant
to the draft decision, utilities may recover the balancing
account balances accrued prior to November 29, 2001 if a utility
is within its rate case cycle and is not over earning as measured
on a pro-forma basis. However, if the utility is over earning,
the utility's recovery of the balancing account balances will be
reduced by the amount of the over earning. At this time, it is
unclear how the CPUC would implement these requirements and
whether San Jose Water Company's ability to recover all of the
balancing account balance of $373,000 accrued prior to November
29, 2001 will be impacted. The draft decision has yet to be
scheduled for CPUC consideration. Furthermore, it is uncertain
how any future CPUC regulation dealing with balancing account
balances accrued after November 29, 2001 ($189,000) will affect
San Jose Water Company's ability to collect the balancing account
under-collection and to receive future offset rate relief.
On September 30, 2002 Governor Davis signed the interim rate bill
(AB 2838), sponsored by the California water utility industry,
into law. The bill allows for the implementation of interim
water rates in general rate cases when the CPUC fails to
establish new rates in accordance with the established rate case
schedule. The interim rates would be based on a water company's
existing rates increased for the amount of inflation since the
last approved rate adjustment. The bill also allows for a revenue
true-up from the time of the implementation of the interim rates
to the time of the CPUC's ultimate decision in the rate case. In
principal, this mechanism is designed to eliminate the adverse
financial impact on water utilities caused by regulatory delays
in general rate cases. The bill goes into effect on January 1,
2003.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
SJW Corp. is subject to market risks in the normal course of
business, including changes in interest rates and equity prices.
The exposure to changes in interest rates is a result of
financings through the issuance of fixed-rate, long-term debt and
short-term funds obtained through the variable rate line of
credit. SJW Corp. also owns 1,099,952 shares of California Water
Service Group and is exposed to the risk of changes in equity
prices.
The Corporation has no derivative financial instruments,
financial instruments with significant off-balance sheet risks,
or financial instruments with concentrations of credit risk.
There is no material sensitivity to change in market rates and
prices.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based
on their evaluation as of September 30, 2002 which is
within 90 days of the filing date of this report, SJW
Corp.'s Chief Executive Officer and Chief Financial
Officer have concluded that SJW Corp.'s disclosure
controls and procedures (as defined in Rules 13a-
14(c) and 15d-14(c)under the Securities Exchange Act
of 1934 ("Exchange Act")) are effective to ensure that
information required to be disclosed by SJW Corp. in
reports that it files or submits under the Exchange Act
is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange
Commission rules and forms.
(b) Changes in internal controls. There have been no
significant changes in internal controls or in other
factors that could significantly affect these controls
subsequent to September 30, 2002, including any
corrective actions with regard to significant
deficiencies and material weaknesses.
PART II. OTHER INFORMATION
--------------------------
Item 5. OTHER INFORMATION
On October 24, 2002, the Board of Directors declared the regular
quarterly dividend of $.69 per common share. The dividend will
be paid December 1, 2002 to shareholders of record as of the
close of business on November 5, 2002.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be filed by Item 601 of
Regulation S-K.
See Exhibit Index located immediately following the
Certifications of this document which is incorporated
herein by reference as required to be filed by Item 601
of Regulation S-K for the quarter ended September 30,
2002.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the
quarter ended September 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SJW Corp.
Date: November 13, 2002 By /s/ Angela Yip
-----------------
Angela Yip
Chief Financial Officer
and Treasurer
Date: November 13, 2002 By /s/ W. Richard Roth
----------------------
W. Richard Roth
President
and Chief Executive Officer
CERTIFICATION
I, W. Richard Roth, President and Chief Executive Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of SJW
Corp. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 --------------------------------
W. Richard Roth
President and
Chief Executive Officer
CERTIFICATION
I, Angela Yip, Chief Financial Officer and Treasurer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of SJW
Corp. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 --------------------------------
Angela Yip
Chief Financial Officer
and Treasurer
EXHIBIT INDEX
-------------
Located in
Exhibit
Sequentially
No. Description Numbered
Copy
- ----------------------------------------------------------------
99.1 Certification by President and Chief Executive 30
Officer.
99.2 Certification by Chief Financial Officer and 31
Treasurer.
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of SJW Corp. (the
"Company") on Form 10-Q for the quarterly period ended September
30, 2002 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, W. Richard Roth, President and
Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly
presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ W. Richard Roth
- ---------------------
W. RICHARD ROTH
President and Chief Executive Officer
November 13, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of SJW, Corp. (the
"Company") on Form 10-Q for the quarterly period ended September
30, 2002 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, Angela Yip, Chief Financial
Officer and Treasurer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly
presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ Angela Yip
- ------------------
ANGELA YIP
Chief Financial Officer and Treasurer
November 13, 2002
24.