FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1998
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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 (I.R.S.Employer
incorporation or organization) Identification No.)
374 West Santa Clara Street, San Jose, CA 95196
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(Address of principal executive offices) (Zip Code)
408-279-7800
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(Registrant's telephone number, including area code)
Not Applicable
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(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 July 1, 1998 and as of the date of
this report are 3,170,347.
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
--------------------
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
(In thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
--------------------------------------
Operating revenue $25,508 31,554 44,844 52,341
Operating expense:
Operation:
Purchased water 5,947 7,663 9,458 13,175
Power 811 1,167 1,299 1,482
Pump taxes 2,599 3,996 4,686 5,096
Other 4,045 4,330 8,562 8,685
Maintenance 1,746 1,608 3,501 3,574
Property and other
nonincome taxes 858 851 1,737 1,665
Depreciation and 2,398 2,195 4,796 4,389
amortization
Income taxes 2,412 3,571 3,425 4,963
-------------------------------------
Total Operating Expenses 20,816 25,381 37,464 43,029
-------------------------------------
Operating income 4,692 6,173 7,380 9,312
Gain on sale of nonutility
property, net of tax 1,629 - 1,629 -
Other income 142 212 261 399
Dividend income 294 290 588 580
Interest and other charges (1,567) (1,551) (3,142) (3,161)
-------------------------------------
Net income $5,190 5,124 6,716 7,130
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Other Comprehensive Income (loss):
Unrealized gain (loss) on
investment (2,131) 2,887 (4,847) 1,237
Income taxes related to
other comprehensive
income (loss) 874 (1,184) 1,987 (507)
-------------------------------------
Other comprehensive
income (loss), net (1,257) 1,703 (2,860) 730
-------------------------------------
Comprehensive income $3,933 6,827 3,856 7,860
=====================================
Basic earnings per share $1.64 1.62 2.12 2.25
=====================================
Comprehensive income
per share $1.24 2.15 1.22 2.48
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Dividends per share
of common stock $0.585 0.57 1.17 1.14
====================================
Weighted average
shares outstanding 3,170,347 3,170,347 3,170,347 3,170,347
=========================================
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(In thousands)
JUNE 30 DECEMBER 31
1998 1997
----------------------------
ASSETS
Utility plant $385,905 371,200
Less accumulated depreciation and
amortization 120,054 114,851
----------------------------
Net utility plant 265,851 256,349
Nonutility property 10,701 7,301
Current assets:
Cash and equivalents 195 3,832
Accounts receivable and accrued
revenue 13,772 10,795
Prepaid expenses and other 1,019 1,231
---------------------------
Total current assets 14,986 15,858
Other assets:
Investment in Calif. Water
Service Group 27,636 32,483
Debt issuance and reacquisition costs 3,911 3,988
Regulatory assets 4,593 4,598
Goodwill 2,042 2,085
Other 816 561
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Total other assets 38,998 43,715
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$ 330,536 323,223
============================
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock $ 9,907 9,907
Additional paid-in capital 19,235 19,235
Retained earnings 98,961 95,954
Accumulated other comprehensive income 5,597 8,457
----------------------------
Shareholders' equity 133,700 133,553
Long-term debt, less current
maturities 75,000 75,000
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Total capitalization 208,700 208,553
Current liabilities:
Accrued interest 2,657 2,657
Accounts payable 2,275 738
Accrued pump taxes and purchased water 3,472 2,072
Income and nonincome taxes payable 3,218 581
Other current liabilities 3,150 2,892
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Total current liabilities 14,772 8,940
Deferred income taxes and tax credits 23,849 24,208
Other noncurrent liabilities 2,838 2,799
Advances for and contributions in aid
of construction 80,377 78,723
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$ 330,536 323,223
============================
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
SIX MONTHS ENDED
JUNE 30
1998 1997
----------------
Operating activities:
Net income $ 6,716 7,130
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,796 4,389
Deferred income taxes and credits (359) 1,156
Gain on sale of non-utility property (1,629) -
Changes in operating assets and liabilities:
Accounts receivable and accrued revenue (2,977) (4,672)
Prepaid expenses and other 212 (488)
Accounts payable and other
current liabilities 1,795 1,571
Accrued pump taxes and purchased water 1,400 2,115
Income and nonincome taxes payable 2,637 3,282
Other changes, net 777 (75)
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Net cash provided by operating activities 13,368 14,408
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Investing activities:
Additions to utility plant (14,979) (9,917)
Additions to nonutility property (3,606) (78)
Cost to retire utility plant 84 (196)
Net proceeds from sale of nonutility property 3,073 0
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Net cash used in investing activities (15,428) (10,191)
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Financing activities:
Dividends paid (3,709) (3,614)
Retirement of long-term debt - (1,500)
Advances and contributions in aid of construction2,758 3,390
Refunds of advances (626) (599)
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Net cash used in financing activities (1,577) (2,323)
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Net change in cash and equivalents (3,637) 1,894
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Cash and equivalents, beginning of period 3,832 11,904
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Cash and equivalents, end of period $ 195 13,798
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Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $2,972 3,021
Income taxes 299 910
SJW CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 1998
NOTE I - 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 incorporated
by reference in SJW Corp.'s 1997 Annual Report on Form 10-K
should be read with the accompanying condensed consolidated
financial statements.
NOTE II - IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, The American Institute of Certified Public
Accountants issued Statement of Position 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 requires that certain
costs during the design, coding, installation to hardware,
and testing be capitalized. Internal and external costs
associated with the "preliminary project stage" and the "post-
implementation/operation stage" should be expensed as
incurred. SJW Corp. intends to adopt this statement before
December 31, 1999. The adoption of SOP 98-1 will not have a
material impact on SJW Corp's results of operations and
financial condition.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 standardizes the accounting for
derivative instruments, by requiring that an entity recognize
those items as assets or liabilities in the statement of
financial position and measure them at fair value. SJW Corp.
intends to adopt SFAS No. 133 by December 31, 1999. The
adoption of SFAS No. 133 will not have a material impact on
SJW Corp's results of operations and financial condition.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources:
SJW Corp. and its subsidiaries have available commercial bank
line of credit that provides for unsecured borrowings of up
to $20,000,000 at rates which approximate the bank's prime or
reference rate. On June 30, 1998, SJW Corp. had available an
unused short-term bank line of credit of $20,000,000.
San Jose Water Company plans to issue $15 million of
unsecured 30-year senior notes through private placement in
the fourth quarter of 1998. Proceeds from the sale of the
unsecured notes will be used to repay short-term borrowings
and fund construction expenditures through the first half of
1999.
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.
Capital expenditures for the next five years are likely to
increase from historical levels due to the addition of new,
or expansion of existing, water treatment, transmission and
distribution, and source of supply facilities and to comply
with environmental regulations. Net capital expenditures for
1998 are estimated at $21,000,000. For the five year period
from 1998 to 2002, San Jose Water Company's net capital
expenditures are estimated to aggregate $110,000,000. Net
capital expenditures represent gross capital expenditures
less advances and contributions in aid of construction.
General:
SJW Corp. is a holding company created in 1985 through an
agreement of merger with San Jose Water Company. SJW Corp.
has operational and financial flexibility and can engage in
nonregulated activities. SJW Corp. also owns 1,099,952
shares of California Water Service Group.
San Jose Water Company is a public utility in the business of
providing water service to approximately 965,000 people in
the metropolitan San Jose area.
SJW Land Company, a wholly owned subsidiary, was formed in
1985 for the purpose of real estate development. It operates
parking facilities located adjacent to the Company's
headquarters and the San Jose Arena.
Results of Operations:
Overview
SJW Corp.'s consolidated net income for the second quarter of
1998 was $5,190,000 an increase of 1% from $5,124,000 in the
second quarter of 1997. The increase in consolidated net
income was due primarily to a gain on sale of nonutility
property, partially offset by decreased customer usage.
Operating Revenue
The change in consolidated operating revenue from the same
period in 1997 was due to the following factors:
Three months ended Six months ended
Operating revenue June 30 1998 vs 1997 June 30 1998 vs 1997
Increase/(decrease) Increase/(decrease)
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Utility:
Consumption $(6,546,000) (21%) $(8,414,000) (16%)
New rates (50,000) - 18,000 -
New customers 551,000 2% 989,000 2%
Parking & Rental (1,000) - (90,000) -
-----------------------------------------
$(6,046,000) (19%) $(7,497,000) (14%)
=========================================
Operating revenue for new customers includes revenue from the
City of Cupertino municipal water system since October 1997.
Operating Expense
The change in consolidated operating expense, excluding
income taxes, from the same period in 1997 was due to the
following:
Three months ended Six months ended
Operating expense June 30 1998 vs 1997 June 30 1998 vs 1997
Increase/(decrease) Increase/(decrease)
-----------------------------------------------------------
Operation and
Maintenance $(3,616,000) (17%) $(4,506,000) (12%)
Depreciation 203,000 1% 407,000 1%
General Taxes 7,000 - 72,000 -
-----------------------------------------
$(3,406,000) (16%) $(4,027,000) (11%)
=========================================
The decrease in operation and maintenance expense was
primarily due to decreased water production costs from
reduced water consumption.
Income tax expense decreased $1,159,000 or 32% in comparison
to the second quarter of 1997. Year-to-date income tax
expense decreased $1,538,000 over the same six-month period
of 1997.
The water business is highly seasonal in nature, a comparison
of the revenue and expense of the current quarter with the
immediate preceding quarter would not be meaningful. Average
usage per metered customer in the second quarter of 1998
decreased 26% from the second quarter of 1997. Year-to-date
average usage per metered customer decreased 21% over 1997.
Water Supply
On August 4, 1998, Santa Clara Valley Water District's 10
reservoirs were 85% full with 141,562 acre feet of water in
storage -- which is above average for the past 20 years. As
of August 1, 1998, the water level in the Santa Clara
groundwater basin exceeded the 30-year average. The heavy
rainfall in the winter of 1998 provided above average surface
water supplies to the Company. Surface water is a less
costly source of water and its availability significantly
impacts the results of operation.
Regulatory Affairs
The Public Utilities Commission of California rendered a rate
decision on July 22, 1996, approving an average annual rate
increase of 1.25% through 1999 for San Jose Water Company.
These rate increases are based on rates of return on ratebase
of 9.28% and 9.25% for the years 1996 and 1997, respectively,
reflecting a return on common equity of 10.2%. The increases
for 1998 and 1999 are to offset operational and financial
attrition.
On January 1, 1998, San Jose Water Company was approved for a
step rate increase in the amount of $1,141,000 or 1%.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In October 1993, Valley Title Company and its insurer filed a
lawsuit in Santa Clara County Superior Court against San Jose
Water Company and other defendants. Plaintiffs claimed a fire
service pipeline ruptured in October, 1992, causing water and
heating oil from an abandoned underground storage tank to
flood the title company's basement.
In April 1995, San Jose Water Company's insurance carrier,
under a reservation of rights, settled with the plaintiff
insurance company for $3.5 million. It is uncertain whether
or not San Jose Water Company will be compelled to contribute
to the settlement. Management has consistently maintained
that the pollution exclusion asserted by its insurance carrier
does not apply to this type of incident, and therefore the
Company will aggressively resist any demand for contribution.
Separately, a jury awarded $3 million to the title company for
its loss of business files. A unanimous appellate court
reversed that judgment which was sustained by the California
Supreme Court this year.
Valley Title Company has now filed a new lawsuit against San
Jose Water Company. The litigation is based upon the same
facts as the first lawsuit but alleges a cause of action in
inverse condemnation.
San Jose Water Company believes it will prevail in the new
lawsuit. If not, San Jose Water Company believes any future
award to the title company will be within the stated limits of
the company's insurance coverage.
In another matter, in June, 1995 the City of San Jose passed
an ordinance directed at San Jose Water Company and imposing a
franchise fee for the use of public streets for water mains.
The ordinance required San Jose Water Company to pay the City
an annual fee based upon future use of city streets.
San Jose Water Company sued to overturn the ordinance. The
company claimed it owns a state constitutional franchise
dating from before 1891 and that the City had no right to
impose a new franchise. San Jose Water Company won the case
and the City has appealed. The company does not believe that
the final legal result will have a material effect on its
financial position.
Item 5. OTHER INFORMATION
On July 23, 1998, the Board of Directors declared the regular
quarterly dividend of $.585 per common share. The dividend
will be paid September 1, 1998 to shareholders of record as of
the close of business on August 3, 1998.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits required to be filed by Item 601 of Regulation S-K
There were no exhibits required to be filed by Item 601 of
Regulation S-K for the quarter ended June 30, 1998.
(b.) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter
ended June 30, 1998.
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: August 13, 1998 By /s/
Angela Yip
Chief Financial Officer