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, 1999
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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 August 1, 1999 and as of the date
of this report are 3,045,147.
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
--------------------
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
(In thousands, except share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
------------------------------------------
Operating revenue $ 30,188 25,508 51,255 44,844
Operating expense:
Operation:
Purchased water 7,138 5,947 11,069 9,458
Power 954 811 1,516 1,299
Pump taxes 3,928 2,599 6,280 4,686
Other 4,735 4,045 9,495 8,562
Maintenance 1,662 1,746 3,283 3,501
Property and other
nonincome taxes 925 858 1,861 1,737
Depreciation and 2,553 2,398 5,116 4,796
amortization
Income taxes 2,745 2,412 3,929 3,425
------------------------------------------
Total operating expenses 24,640 20,816 42,549 37,464
------------------------------------------
Operating income 5,548 4,692 8,706 7,380
Gain on sale of nonutility
property, net of tax - 1,629 - 1,629
Other income 99 142 230 261
Dividend income 298 294 597 588
Interest and other
charges (1,870) (1,567) (3,677) (3,142)
------------------------------------------
Net income $ 4,075 5,190 5,856 6,716
==========================================
Other comprehensive income (loss):
Unrealized gain (loss)
on investment 1,787 (2,131) (5,706) (4,847)
Income taxes related to
other comprehensive
income (loss) (732) 874 2,340 1,987
------------------------------------------
Other comprehensive
income (loss), net 1,055 (1,257) (3,366) (2,860)
-----------------------------------------
Comprehensive income $ 5,130 3,933 2,490 3,856
=========================================
Basic earnings per
share $ 1.34 1.64 1.91 2.12
=========================================
Comprehensive income
per share $ 1.68 1.24 .81 1.22
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Dividends per share
of common stock $ 0.60 0.585 1.20 1.17
==========================================
Weighted average
shares outstanding 3,045,147 3,170,347 3,064,814 3,170,347
==========================================
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(In thousands)
JUNE 30 DECEMBER 31
1999 1998
---------------------
ASSETS
Utility plant $416,814 403,227
Less accumulated depreciation and
amortization 127,894 122,809
---------------------
Net utility plant 288,920 280,418
Nonutility property 11,327 11,360
Current assets:
Cash and equivalents 2,602 8,066
Accounts receivable and accrued
revenue 16,424 11,910
Prepaid expenses and other 1,123 1,249
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Total current assets 20,149 21,225
Other assets:
Investment in California Water
Service Group 28,736 34,442
Debt issuance and reacquisition costs 3,961 4,032
Regulatory assets 5,152 5,137
Goodwill 1,957 2,000
Other 849 766
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Total other assets 40,655 46,377
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$361,051 359,380
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CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock $ 9,516 9,899
Additional paid-in capital 12,356 19,085
Retained earnings 106,684 104,553
Accumulated other comprehensive income 6,246 9,612
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Shareholders' equity 134,802 143,149
Long-term debt 90,000 90,000
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Total capitalization 224,802 233,149
Current liabilities:
Line of credit 2,900 -
Accrued interest 2,746 2,720
Accounts payable 1,571 2,163
Accrued pump taxes and purchased water 4,476 2,423
Income and nonincome taxes payable 4,433 1,353
Other current liabilities 3,838 3,095
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Total current liabilities 19,964 11,754
Deferred income taxes and tax credits 25,817 27,790
Other non-current liabilities 3,330 2,916
Advances for and contributions in aid
of construction 87,138 83,771
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$361,051 359,380
=====================
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
SIX MONTHS ENDED
JUNE 30
1999 1998
-----------------
Operating activities:
Net income $ 5,856 6,716
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,116 4,796
Deferred income taxes and credits (1,973) (359)
Gain on sale of nonutility property - (1,629)
Changes in operating assets and liabilities:
Accounts receivable and accrued revenue (4,514) (2,977)
Prepaid expenses and other 126 212
Accounts payable and other
current liabilities 151 1,795
Accrued pump taxes and purchased water 2,053 1,400
Income and nonincome taxes payable 3,080 2,637
Other changes, net 2,991 777
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Net cash provided by operating activities 12,886 13,368
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Investing activities:
Additions to utility plant (14,039) (14,979)
Additions to nonutility property (53) (3,606)
Cost to retire utility plant (219) 84
Net proceeds from sale of nonutility property - 3,073
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Net cash used in investing activities (14,311) (15,428)
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Financing activities:
Dividends paid (3,725) (3,709)
Borrowings from line of credit 2,900 -
Advances and contributions in aid of 4,576 2,758
construction
Refunds of advances (679) (626)
Purchase and retirement of common stock (7,111) -
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Net cash used in financing activities (4,039) (1,577)
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Net change in cash and equivalents (5,464) (3,637)
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Cash and equivalents, beginning of period 8,066 3,832
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Cash and equivalents, end of period $ 2,602 195
================
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $3,524 2,972
Income taxes 517 299
SJW CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 1999
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 1998 Annual Report on Form 10-K
should be read with the accompanying condensed consolidated
financial statements.
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 a 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, 1999, SJW Corp. had
available an unused short-term bank line of credit of
$17,100,000.
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 1999 are estimated at
$21,400,000. For the five year period from 1999 to 2003,
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 971,000 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 1999 was $4,075,000 a decrease of 21% from $5,190,000 in
the second quarter of 1998. The decrease in consolidated
net income was due primarily to a gain on sale of nonutility
property in the second quarter of 1998, partially offset by
increased customer usage.
Operating Revenue
The change in consolidated operating revenue from the same
period in 1998 was due to the following factors:
Three months ended Six months ended
Operating revenue June 30 1999 vs 1998 June 30 1999 vs 1998
Increase/(decrease) Increase/(decrease)
------------------------------------------------------------
Utility:
Consumption $ 3,143,000 12% $3,929,000 9%
New rates 1,214,000 5 1,949,000 4
New customers 198,000 1 324,000 1
Parking & Rental 125,000 - 209,000
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$ 4,680,000 18% $6,411,000 14%
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Operating Expense
The change in consolidated operating expense, excluding
income taxes, from the same period in 1998 was due to the
following:
Three months ended Six months ended
Operating expense June 30 1999 vs 1998 June 30 1999 vs 1998
Increase/(decrease) Increase/(decrease)
-----------------------------------------------------------
Operation and
Maintenance $ 3,269,000 18% $ 4,137,000 12%
Depreciation 155,000 1 320,000 1
General Taxes 67,000 - 124,000 -
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$ 3,491,000 19% $ 4,581,000 13%
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The increase in operation and maintenance expense was
primarily due to increased water production costs from
higher water consumption.
Income tax expense increased $333,000 or 14% in comparison
to the second quarter of 1998. Year-to-date income tax
expense decreased $504,000 over the same six-month period of
1998.
The water business is highly seasonal in nature, therefore 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 1999 increased 12% from the second quarter
of 1998. Year-to-date average usage per metered customer
increased 10% over 1998.
Water Supply
On July 29, 1999, Santa Clara Valley Water District's 10
reservoirs were 73% full with 124,338 acre feet of water in
storage -- which is above average for the past 20 years. As
of August 1, 1999, the water level in the Santa Clara
groundwater basin exceeded the 30-year average. The
rainfall in the winter of 1999 provided moderately 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.
Year 2000 Issues
San Jose Water Company executives, as part of their
operating duties, are evaluating the company's information
technology (IT) and non-IT systems to ensure all systems are
prepared for the Year 2000 (Y2K). The company generally
uses software packages and hardware that are Y2K assured.
The company has received confirmation from various software
and hardware vendors, as well as independent testers, that
the systems are Y2K ready.
San Jose Water Company has an IT master plan that identifies
systems that need to be replaced due to age, or need to be
modified to generate operating and customer service
benefits. The systems that are currently identified as non-
assured were scheduled to be upgraded as part of the IT
master plan. The last of these upgrades will be complete in
October, 1999.
Management also contacted critical third party suppliers
regarding their Y2K readiness. Suppliers of water, power,
and other goods are critical to San Jose Water Company's
operations. The suppliers described their state of
readiness and contingency plans, if available. The company's
wholesale supplier, Santa Clara Valley Water District
(SCVWD), relies on the supply from the state government's
Department of Water Resources (DWR). As of today, DWR has
completed the modification required to be Y2K assured, and
the DWR consultant has completed its audit on the
enhancement. Contingency plans are in place to supply the
SCVWD system by gravity from Anderson Reservoir.
To date there have been no significant costs associated
solely with Y2K issues. The company does not anticipate
incurring material future costs directly related to the Y2K,
such as modifying software and hiring Y2K solution
providers. No major IT projects has been deferred due to
Y2K issues. The costs of identifying the issues, evaluating
the systems, inquiring about third party suppliers' Y2K
preparedness, and any testing are currently being expensed.
Future Y2K assurance consulting costs are expected to
approximate $10,000 and will be expensed before October
1999.
San Jose Water Company has Y2K contingency plans covering
accounting, operations, and information systems. These
plans will be modified as additional information becomes
available. In the worst case scenario, if SCVWD is unable
to provide water to the company, power supplies are
interrupted, and the computer system that controls the water
distribution function fails, the company may be able to use
its standby generators to pump limited water from its wells
to the distribution system.
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 July 1, 1999, San Jose Water Company was approved for an
offset rate increase in the amount of $3,304,000 or 3.2% to
offset the purchased water and pump tax rate increase
instituted by the Santa Clara Valley Water District. Offset
rate increase is a cost reimbursement and is not designed to
increase the earnings of the utility.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In 1993, Valley Title Company and its insurer claimed in a
lawsuit that a fire service pipeline ruptured, causing water
and heating oil to flood the title company's basement. In
April 1995, San Jose Water Company's insurance carrier
settled the property damage claim of plaintiff insurance
company for $3.5 million.
The jury separately awarded plaintiff title company $3
million for its loss of business documents. A unanimous
appellate court reversed this decision, and in January 1998,
the California Supreme Court denied review of that reversal.
In July 1998, Maxxum Management Company, successor to Valley
Title Company, 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.
Management has consistently maintained that any future award
to the plaintiff will be within the stated limit of the
Corporation's insurance coverage.
Item 5. OTHER INFORMATION
On October 22, 1998, the Board of Directors approved a stock
repurchase program whereby SJW Corp. can repurchase up to
250,000 shares of its outstanding shares. As of June 30,
1999, the Corporation has repurchased 125,200 shares at the
prevailing market price at an aggregate cost of $7,271,000 of
which $7,111,000 was repurchased during the first quarter of
1999. All repurchased shares have been cancelled and are
considered authorized and non-issued.
On July 22, 1999, the Board of Directors declared the regular
quarterly dividend of $.60 per common share. The dividend
will be paid September 1, 1999 to shareholders of record as
of the close of business on August 2, 1999.
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, 1999.
(b.) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter
ended June 30, 1999.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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 changes in market rates and
prices.
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, 1999 By /s/
Angela Yip
Vice President of Finance,
Chief Financial Officer
and Treasurer