UNITED
STATES
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
the quarterly period ended
|
|
September
30, 2007
|
Commission
file number
|
|
1-8966
|
SJW
Corp.
|
(Exact
name of registrant as specified in its
charter)
|
California
|
|
77-0066628
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
|
|
|
374
West Santa Clara Street, San Jose, CA
|
|
95113
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
408-279-7800
|
(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 o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large filer” in Rule 12b-2 of the Exchange Act. (check
one)
Large
accelerated filer o
Accelerated filer x Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes o No x
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Common
shares outstanding as of October 15, 2007 are 18,360,952.
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
|
|
NINE MONTHS
|
|
|
|
ENDED SEPT 30
|
|
ENDED SEPT 30
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
OPERATING
REVENUE
|
|
$
|
64,847
|
|
$
|
63,119
|
|
$
|
158,999
|
|
$
|
144,734
|
|
OPERATING
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
water
|
|
|
16,760
|
|
|
16,067
|
|
|
39,373
|
|
|
34,233
|
|
Power
|
|
|
2,565
|
|
|
2,415
|
|
|
5,741
|
|
|
4,137
|
|
Groundwater
extraction charges
|
|
|
10,222
|
|
|
8,023
|
|
|
22,343
|
|
|
14,527
|
|
Total
production costs
|
|
|
29,547
|
|
|
26,505
|
|
|
67,457
|
|
|
52,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
and general
|
|
|
5,575
|
|
|
5,632
|
|
|
16,630
|
|
|
15,670
|
|
Other
|
|
|
3,724
|
|
|
3,709
|
|
|
10,973
|
|
|
11,084
|
|
Maintenance
|
|
|
2,819
|
|
|
2,680
|
|
|
8,606
|
|
|
7,308
|
|
Property
taxes and other nonincome taxes
|
|
|
1,583
|
|
|
1,565
|
|
|
4,739
|
|
|
4,414
|
|
Depreciation
and amortization
|
|
|
5,690
|
|
|
5,508
|
|
|
16,975
|
|
|
15,984
|
|
Income
taxes
|
|
|
5,178
|
|
|
6,119
|
|
|
10,419
|
|
|
12,558
|
|
Total
operating expense
|
|
|
54,116
|
|
|
51,718
|
|
|
135,799
|
|
|
119,915
|
|
OPERATING
INCOME
|
|
|
10,731
|
|
|
11,401
|
|
|
23,200
|
|
|
24,819
|
|
OTHER
(EXPENSE) INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on senior notes
|
|
|
(2,706
|
)
|
|
(2,222
|
)
|
|
(8,159
|
)
|
|
(6,837
|
)
|
Mortgage
and other interest expense
|
|
|
(541
|
)
|
|
(161
|
)
|
|
(1,483
|
)
|
|
(700
|
)
|
Dividends
|
|
|
319
|
|
|
317
|
|
|
957
|
|
|
949
|
|
Gain
on sale of nonutility property, net of taxes of $1,056
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,535
|
|
Other,
net
|
|
|
208
|
|
|
(477
|
)
|
|
1,024
|
|
|
(234
|
)
|
NET
INCOME
|
|
|
8,011
|
|
|
8,858
|
|
|
15,539
|
|
|
19,532
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
income (loss) on investment
|
|
|
1,088
|
|
|
1,309
|
|
|
(2,113
|
)
|
|
(1,430
|
)
|
Less:
income taxes related to other comprehensive income (loss)
|
|
|
(446
|
)
|
|
(537
|
)
|
|
866
|
|
|
586
|
|
Other
comprehensive income (loss), net
|
|
|
642
|
|
|
772
|
|
|
(1,247
|
)
|
|
(844
|
)
|
COMPREHENSIVE
INCOME
|
|
$
|
8,653
|
|
$
|
9,630
|
|
$
|
14,292
|
|
$
|
18,688
|
|
EARNINGS
PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.44
|
|
$
|
0.48
|
|
$
|
0.85
|
|
$
|
1.07
|
|
Diluted
|
|
$
|
0.43
|
|
$
|
0.48
|
|
$
|
0.84
|
|
$
|
1.05
|
|
DIVIDENDS
PER SHARE
|
|
$
|
0.15
|
|
$
|
0.14
|
|
$
|
0.45
|
|
$
|
0.42
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,350,007
|
|
|
18,277,728
|
|
|
18,325,206
|
|
|
18,273,558
|
|
Diluted
|
|
|
18,561,631
|
|
|
18,558,508
|
|
|
18,539,587
|
|
|
18,539,781
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
SJW
Corp.
and Subsidiaries
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in
thousands, except share and per share data)
|
|
SEPTEMBER
30
|
|
DECEMBER
31
|
|
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
Utility
plant:
|
|
|
|
|
|
Land
|
|
$
|
5,668
|
|
$
|
4,837
|
|
Depreciable
plant and equipment
|
|
|
764,249
|
|
|
716,679
|
|
Construction
in progress
|
|
|
14,748
|
|
|
10,863
|
|
Intangible
assets
|
|
|
8,040
|
|
|
8,040
|
|
|
|
|
792,705
|
|
|
740,419
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
251,836
|
|
|
234,173
|
|
|
|
|
|
|
|
|
|
|
|
|
540,869
|
|
|
506,246
|
|
|
|
|
|
|
|
|
|
Nonutility
property
|
|
|
88,010
|
|
|
43,868
|
|
Less
accumulated depreciation and amortization
|
|
|
3,291
|
|
|
3,303
|
|
|
|
|
|
|
|
|
|
|
|
|
84,719
|
|
|
40,565
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
2,227
|
|
|
3,788
|
|
Accounts
receivable:
|
|
|
|
|
|
|
|
Customers,
net of allowances for uncollectible accounts
|
|
|
13,915
|
|
|
9,861
|
|
Other
|
|
|
911
|
|
|
1,028
|
|
Accrued
unbilled utility revenue
|
|
|
18,711
|
|
|
11,067
|
|
Sale
proceeds held in trust account
|
|
|
-
|
|
|
31,261
|
|
Materials
and supplies
|
|
|
871
|
|
|
932
|
|
Prepaid
expenses
|
|
|
1,971
|
|
|
1,538
|
|
|
|
|
|
|
|
|
|
|
|
|
38,606
|
|
|
59,475
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
Investment
in California Water Service Group
|
|
|
42,337
|
|
|
44,438
|
|
Unamortized
debt issuance and reacquisition costs
|
|
|
3,264
|
|
|
3,220
|
|
Regulatory
assets
|
|
|
49,581
|
|
|
50,483
|
|
Other
|
|
|
2,230
|
|
|
1,437
|
|
|
|
|
|
|
|
|
|
|
|
|
97,412
|
|
|
99,578
|
|
|
|
|
|
|
|
|
|
|
|
$
|
761,606
|
|
$
|
705,864
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
SJW
Corp.
and Subsidiaries
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in
thousands, except share and per share data)
|
|
SEPTEMBER
30
|
|
DECEMBER
31
|
|
|
|
2007
|
|
2006
|
|
CAPITALIZATION
AND LIABILITIES
|
|
|
|
|
|
CAPITALIZATION:
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
Common
stock, $0.521 par value; authorized 36,000,000 shares;
issued
and outstanding 18,360,952 shares on September 30, 2007 and
18,280,646 in 2006
|
|
$
|
9,563
|
|
$
|
9,522
|
|
Additional
paid-in capital
|
|
|
18,574
|
|
|
16,267
|
|
Retained
earnings
|
|
|
194,377
|
|
|
186,876
|
|
Accumulated
other comprehensive income
|
|
|
14,270
|
|
|
15,517
|
|
Total
shareholders’ equity
|
|
|
236,784
|
|
|
228,182
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
196,461
|
|
|
163,648
|
|
|
|
|
|
|
|
|
|
|
|
|
433,245
|
|
|
391,830
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Line
of credit
|
|
|
7,500
|
|
|
15,500
|
|
Current
portion of long-term debt
|
|
|
654
|
|
|
485
|
|
Accrued
groundwater extraction charges and purchased water
|
|
|
12,033
|
|
|
4,244
|
|
Purchased
power
|
|
|
1,601
|
|
|
301
|
|
Accounts
payable
|
|
|
7,978
|
|
|
7,267
|
|
Accrued
interest
|
|
|
3,004
|
|
|
3,871
|
|
Accrued
taxes
|
|
|
2,863
|
|
|
-
|
|
Accrued
payroll
|
|
|
1,148
|
|
|
1,432
|
|
Work
order deposit
|
|
|
489
|
|
|
417
|
|
Other
current liabilities
|
|
|
3,793
|
|
|
3,729
|
|
|
|
|
|
|
|
|
|
|
|
|
41,063
|
|
|
37,246
|
|
|
|
|
|
|
|
|
|
DEFERRED
INCOME TAXES
|
|
|
78,695
|
|
|
81,552
|
|
UNAMORTIZED
INVESTMENT TAX CREDITS
|
|
|
1,750
|
|
|
1,795
|
|
ADVANCES
FOR CONSTRUCTION
|
|
|
74,677
|
|
|
67,955
|
|
CONTRIBUTIONS
IN AID OF CONSTRUCTION
|
|
|
97,670
|
|
|
95,225
|
|
DEFERRED
REVENUE
|
|
|
1,339
|
|
|
1,262
|
|
POSTRETIREMENT
BENEFIT PLANS
|
|
|
28,921
|
|
|
26,298
|
|
OTHER
NONCURRENT LIABILITIES
|
|
|
4,246
|
|
|
2,701
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
761,606
|
|
$
|
705,864
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
SJW
Corp.
and Subsidiaries
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in
thousands)
|
|
|
NINE MONTHS
ENDED SEPTEMBER 30
|
|
|
|
|
2007
|
|
|
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
15,539
|
|
$
|
19,532
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
16,975
|
|
|
15,984
|
|
Deferred
income taxes
|
|
|
(2,902
|
)
|
|
(1,483
|
)
|
Share-based
compensation
|
|
|
579
|
|
|
522
|
|
Gain
on sale of nonutility property, net of taxes
|
|
|
-
|
|
|
(1,535
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable and accrued unbilled utility revenue
|
|
|
(11,581
|
)
|
|
(12,351
|
)
|
Accounts
payable, purchased power and other current liabilities
|
|
|
(682
|
)
|
|
4,547
|
|
Accrued
groundwater extraction charges and purchased water
|
|
|
7,789
|
|
|
3,439
|
|
Accrued
taxes
|
|
|
2,868
|
|
|
3,491
|
|
Accrued
interest
|
|
|
(867
|
)
|
|
(1,189
|
)
|
Accrued
payroll
|
|
|
(284
|
)
|
|
383
|
|
Prepaid
expenses and materials and supplies
|
|
|
(372
|
)
|
|
(344
|
)
|
Postretirement
benefits
|
|
|
2,717
|
|
|
(1,390
|
)
|
Other
noncurrent assets and noncurrent liabilities
|
|
|
2,459
|
|
|
985
|
|
Other
changes, net
|
|
|
1,291
|
|
|
880
|
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
33,529
|
|
|
31,471
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
Additions
to utility plant
|
|
|
(46,954
|
)
|
|
(45,619
|
)
|
Additions
to nonutility property
|
|
|
(48,245
|
)
|
|
(12,630
|
)
|
Cost
to retire utility plant, net of salvage
|
|
|
(893
|
)
|
|
(599
|
)
|
Proceeds
from sale of nonutility property
|
|
|
-
|
|
|
2,739
|
|
Cash
acquired from the acquisition of Canyon Lake Water Supply Corporation,
net
of payments made for the acquisition
|
|
|
-
|
|
|
4,083
|
|
Sale
proceeds from trust account
|
|
|
31,261
|
|
|
-
|
|
|
|
|
|
|
|
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(64,831
|
)
|
|
(52,026
|
)
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
Discharge
of Canyon Lake Water Supply Corporation bonds
|
|
|
-
|
|
|
(19,951
|
)
|
Borrowings
from line of credit
|
|
|
16,800
|
|
|
29,500
|
|
Repayments
of line of credit
|
|
|
(24,800
|
)
|
|
(1,500
|
)
|
Long-term
borrowings
|
|
|
33,500
|
|
|
3,854
|
|
Repayments
of long-term borrowings
|
|
|
(519
|
)
|
|
(280
|
)
|
Dividends
paid
|
|
|
(8,312
|
)
|
|
(7,744
|
)
|
Exercise
of stock options and similar instruments
|
|
|
1,392
|
|
|
278
|
|
Tax
benefits realized from share options exercised
|
|
|
377
|
|
|
-
|
|
Receipts
of advances and contributions in aid of construction
|
|
|
12,935
|
|
|
11,409
|
|
Refunds
of advances for construction
|
|
|
(1,632
|
)
|
|
(1,513
|
)
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
29,741
|
|
|
14,053
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(1,561
|
)
|
|
(6,502
|
)
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
3,788
|
|
|
9,398
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
2,227
|
|
$
|
2,896
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
|
11,074
|
|
|
9,308
|
|
Income
taxes
|
|
|
8,023
|
|
|
10,907
|
|
Supplemental
disclosure of non-cash activities:
|
|
|
|
|
|
|
|
Increase
in accrued payables for additions to utility plant
|
|
|
2,659
|
|
|
2,289
|
|
Decrease
in nonutility property due to transfer to utility property
|
|
|
3,035
|
|
|
-
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
SJW
CORP. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(in
thousands, except share and per share data)
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 2006 Annual Report on Form
10-K should be read with the accompanying condensed consolidated financial
statements.
Water
sales are seasonal in nature. The demand for water, especially by residential
customers, is generally influenced by weather conditions. The timing of
precipitation and climactic conditions can cause seasonal water consumption
by
residential customers to vary significantly. Due to the seasonal nature of
the
water business, the operating results for interim periods are not indicative
of
the operating results for a 12-month period. Revenue is generally higher in
the
warm, dry summer months when water usage and sales are greater and lower in
the
winter when cooler temperatures and increased rainfall curtail water usage
and
sales.
Basic
earnings per share is calculated using income available to common shareholders,
divided by the weighted average number of shares outstanding during the period.
Diluted earnings per share is calculated using income available to common
shareholders divided by the weighted average number of common shares including
both shares outstanding and shares potentially issued in connection with stock
options, deferred restricted common stock awards under SJW Corp.’s Long-Term
Incentive Plan (the “Incentive Plan”) and shares potentially issued under the
Employee Stock Purchase Plan.
For
the
three months ended September 30, 2007 and 2006, the basic weighted average
number of common shares was 18,350,007 and 18,277,728, respectively. For the
nine months ended September 30, 2007 and 2006, the basic weighted average number
of common shares was 18,325,206 and 18,273,558, respectively. For the three
months ended September 30, 2007 and 2006, the diluted weighted average number
of
common shares was 18,561,631 and 18,558,508, respectively. For the nine months
ended September 30, 2007 and 2006, the diluted weighted average number of common
shares was 18,539,587 and 18,539,781, respectively. For the three and nine
months ended September 30, 2006, 28,164 option share equivalents were excluded
from the dilutive calculation because they were anti-dilutive.
Note
2. Long-Term
Incentive Plan and Share-Based Payments
On
January 1, 2006, SJW Corp. adopted Statement of Financial Accounting Standards
(“SFAS”) No. 123R, “Share-Based Payment” (“SFAS 123R”), which requires the
measurement and recognition of compensation expense based on estimated fair
value for all share-based payment awards.
SJW
Corp.’s Incentive Plan provides for grants to employees and non-employee Board
members. The types of awards included in the Incentive Plan are stock options,
dividend units, restricted stock, and deferred restricted stock units. The
remaining shares available for issuance under the Incentive Plan are 1,344,896.
As of September 30, 2007, the number of awarded shares pursuant to the
Incentive Plan was 369,410. The total compensation cost charged to income under
the Incentive Plan for the three and nine months ended September 30, 2007,
was
$132 and $505, respectively, and for the three and nine months ended September
30, 2006, was $138 and $522, respectively. The total increase in shareholders’
equity resulting from the Incentive Plan for the three and nine months ended
September 30, 2007, was $132 and $721, respectively, and for the three and
nine
months ended September 30, 2006, was $82 and $551, respectively.
SJW
Corp.
utilizes the Black-Scholes option-pricing model to determine the fair value
of
stock options and employee stock purchase plan awards under SFAS 123R. The
Black-Scholes option-pricing model incorporates various subjective assumptions
including expected volatility, expected term, expected dividend yield and
interest rates. The expected volatility for both stock options and Employee
Stock Purchase Plan (“ESPP”) awards is estimated by historical stock price
volatility over the estimated expected term of SJW Corp.’s share-based awards.
The expected term of SJW Corp.’s share-based awards are based on historical
experience.
Stock
Options
No
options were granted during the three and nine months ending September 30,
2007
and 2006.
SJW
Corp.
does not project any foreseeable terminations which could lead to forfeiture
of
unvested options. SJW Corp. has recognized share-based compensation expense
for
the stock options granted under the Incentive Plan of $23 and $82 for the three
and nine months ended September 30, 2007, respectively, and $33 and $98 for
the
three and nine months ended September 30, 2006, respectively. As of September
30, 2007, total unrecognized compensation costs related to stock options
amounted to $92. These costs are expected to be recognized over a weighted
average period of 1.0 year.
SFAS
123R
requires the cash flows resulting from the tax benefits for tax deduction in
excess of the compensation expense recorded for those options (excess tax
benefits) to be classified as cash from financing activities. For the three
and
nine months ended September 30, 2007, total cash received on exercise of options
amounted to $465 and $1,054, respectively, and the tax benefit realized from
stock options exercised amounted to $162 and $391, respectively. For the nine
months ended September 30, 2006, total cash received on exercise of options
amounted to $15 and the tax benefit realized from stock options exercised
amounted to $3.
Restricted
Stock and Deferred Restricted Stock Plans
Under
SJW
Corp.’s Deferred Restricted Stock Program, SJW Corp. may grant deferred
restricted stock units to non-employee Board members. In addition, SJW Corp.’s
Deferral Election Program, as amended on June 1, 2006 (the “Deferral Program”),
also allows meeting fees earned for the 2007 calendar year to be deferred
into deferred restricted stock units. Previously, only retainer fees were
allowed to be deferred under the Deferral Program. Such retainer fees and
meeting fees are collectively referred to as the “Annual Service
Fees.”
As
of
September 30, 2007, a total of 21,000 restricted and deferred restricted stock
units had been granted to a key employee of SJW Corp., of which 7,000 restricted
stock units vest upon the achievement of certain market conditions related
to
SJW Corp.’s common stock. In addition, 7,742 deferred restricted stock units
were granted to non-employee Board members.
SJW
Corp.
has recognized an aggregate share-based compensation expense of $109 and $423
for the three and nine months ended September 30, 2007, respectively, and $49
and $257 for the three and nine months ended September 30, 2006, respectively,
related to restricted and deferred restricted stock awards to employees and
non-employee Board members of SJW Corp. As of September 30, 2007, the total
unrecognized compensation costs were $893. These costs are expected to be
recognized over a weighted average period of 1.75 years.
Dividend
Equivalent Rights
Under
the
Incentive Plan, holders of options, restricted stock and deferred restricted
stock awards have the right to receive dividend rights each time a dividend
is
paid on common shares after the grant date. Stock compensation on dividend
equivalent rights is recognized as a liability and recorded against retained
earnings on the date dividends are issued.
On
April
2, 2007, the final dividend equivalent rights related to the 2003 option grants
were converted to common stock units and 246 shares were credited into the
participants’ option deferred stock unit accounts. Accordingly, on April 29,
2007, 5,849 shares of common stock attributed to the 2003 option grant were
fully vested and issued under the Incentive Plan to participants. The tax
benefit realized from the stock issuance was $35.
For
the
three and nine months ended September 30, 2007, $53 and $171, respectively,
and
the three and nine months ended September 30, 2006, $56 and $168, respectively,
related to dividend equivalent rights were recorded against retained earnings
and were accrued as a liability.
Employee
Stock Purchase Plan
The
ESPP
allows eligible employees to purchase shares of SJW Corp.’s common stock
at 85% of the fair market value of shares on the purchase date. Under the
ESPP, employees can designate up to a maximum of 10% of their base
compensation for the purchase of shares of common stock, subject to certain
restrictions. A total of 270,400 shares of common stock have been reserved
for
issuance under the ESPP.
After
considering the estimated employee terminations or withdrawals from the plan
before the purchase date, SJW Corp. recorded expense of $13 and $56 for the
three and nine months ended September 30, 2007, respectively, and $15 and $45
for the three and nine months ended September 30, 2006, respectively, related
to
the ESPP.
The
total
unrecognized compensation costs related to the semi-annual offering period
that
ends January 31, 2008 for the ESPP is approximately $28.
This
cost is expected to be recognized during the fourth quarter of 2007 and first
quarter of 2008.
Note
3. Nonregulated
Business
The
“Water Utility Services” activities of SJW Corp. consist primarily of two of its
subsidiaries, 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 and SJWTX Water, Inc., doing business as Canyon Lake
Water Service Company, which is regulated by the Texas Commission on
Environmental Quality. Included in the total operating revenue and operating
expense are the nonregulated business activities of SJW Corp. The nonregulated
businesses of SJW Corp. are comprised of operating the City of Cupertino
Municipal Water Systems and lease operations of several commercial buildings
and
properties of SJW Land Company, and the sale and rental of water conditioning
and purification equipment, through January 31, 2007, of Crystal Choice Water
Service LLC (see Note 10). The following tables represent the distribution
of
the regulated and nonregulated business activities for the three and nine months
ended September 30, 2007 and 2006:
|
|
Three Months Ended
September 30, 2007
|
|
Three Months Ended
September 30, 2006
|
|
|
|
|
|
Non
|
|
|
|
|
|
Non
|
|
|
|
|
|
Regulated
|
|
Regulated
|
|
Total
|
|
Regulated
|
|
Regulated
|
|
Total
|
|
Revenue
|
|
$
|
61,743
|
|
$
|
3,104
|
|
$
|
64,847
|
|
$
|
60,287
|
|
$
|
2,832
|
|
$
|
63,119
|
|
Expenses
|
|
|
52,023
|
|
|
2,093
|
|
|
54,116
|
|
|
49,530
|
|
|
2,188
|
|
|
51,718
|
|
Operating
income
|
|
$
|
9,720
|
|
$
|
1,011
|
|
$
|
10,731
|
|
$
|
10,757
|
|
$
|
644
|
|
$
|
11,401
|
|
|
|
Nine Months Ended
September 30, 2007
|
|
Nine Months Ended
September 30, 2006
|
|
|
|
|
|
Non
|
|
|
|
|
|
Non
|
|
|
|
|
|
Regulated
|
|
Regulated
|
|
Total
|
|
Regulated
|
|
Regulated
|
|
Total
|
|
Revenue
|
|
$
|
150,471
|
|
$
|
8,528
|
|
$
|
158,999
|
|
$
|
137,499
|
|
$
|
7,235
|
|
$
|
144,734
|
|
Expenses
|
|
|
129,785
|
|
|
6,014
|
|
|
135,799
|
|
|
113,982
|
|
|
5,933
|
|
|
119,915
|
|
Operating
income
|
|
$
|
20,686
|
|
$
|
2,514
|
|
$
|
23,200
|
|
$
|
23,517
|
|
$
|
1,302
|
|
$
|
24,819
|
|
Note
4. Nonutility
Property
The
major
components of net nonutility property as of September 30, 2007 and December
31,
2006 are as follows:
|
|
|
September 30,
2007
|
|
|
December 31,
2006
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
30,103
|
|
$
|
8,947
|
|
Buildings
and improvements
|
|
|
57,676
|
|
|
34,690
|
|
Intangibles
|
|
|
231
|
|
|
231
|
|
Subtotal
|
|
|
88,010
|
|
|
43,868
|
|
Less:
accumulated depreciation and amortization
|
|
|
3,291
|
|
|
3,303
|
|
Total
|
|
$
|
84,719
|
|
$
|
40,565
|
|
Depreciation
of nonutility property is computed using the straight-line method over the
estimated service lives of the assets, ranging from 5 to 39 years.
On
February 9, 2007, SJW Land Company reinvested the proceeds from the sale of
nonutility properties received on December 15, 2006 by purchasing approximately
54 acres of nonutility property with an office and distribution facilities
in
Knoxville, Tennessee for approximately $47,625.
Note
5. Employee
Benefit Plans
The
components of net periodic benefit costs for San Jose Water Company’s pension
plan, Executive Supplemental Retirement Plan and other postretirement
benefit plan for the three and nine months ended September 30, 2007 and 2006
are
as follows:
|
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Service
cost
|
|
$
|
620
|
|
$
|
571
|
|
$
|
1,860
|
|
$
|
1,713
|
|
Interest
cost
|
|
|
1,068
|
|
|
958
|
|
|
3,206
|
|
|
2,874
|
|
Other
cost
|
|
|
369
|
|
|
413
|
|
|
1,106
|
|
|
1,239
|
|
Expected
return on assets
|
|
|
(885
|
)
|
|
(769
|
)
|
|
(2,656
|
)
|
|
(2,307
|
)
|
|
|
$
|
1,172
|
|
$
|
1,173
|
|
$
|
3,516
|
|
$
|
3,519
|
|
Internal
Revenue Service regulations do not require SJW Corp. to make contributions
for
the 2007 plan year, however, San Jose Water Company expects to make a
contribution of $362 to the other postretirement benefit plan before the end
of
2007.
Note
6. Segment
Reporting
SJW
Corp.
is a holding company with four subsidiaries: (i) San Jose Water Company, a
water
utility operation with both regulated and nonregulated businesses, (ii) SJW
Land
Company and its consolidated variable interest entity - 444 West Santa
Clara Street, L.P., which operates commercial building rentals (“Real Estate
Services”), (iii) SJWTX Water, Inc. doing business as Canyon Lake Water
Service Company, a regulated water utility located in Canyon Lake, Texas, and
(iv) through January 31, 2007, Crystal Choice Water Service LLC, a business
providing the sale and rental of water conditioning and purification equipment
(see Note 10). In accordance with SFAS No. 131, “Disclosures about Segments of
an Enterprise and Related Information,” SJW Corp. has determined that it has two
reportable business segments. The first segment is that of providing water
utility and utility related services to its customers, through SJW Corp.’s
subsidiaries, the Water Utility Services. The second segment is property
management and investment activity conducted by SJW Land Company, the Real
Estate Services.
SJW
Corp.’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 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 SJW Corp. not included
in
the reportable segments is included in the “All Other” category.
|
|
Three
Months Ended September 30, 2007
|
|
|
|
Water
Utility
|
|
Real Estate
|
|
All
|
|
SJW
|
|
|
|
Services
|
|
Services
|
|
Other*
|
|
Corp.
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
|
63,174
|
|
|
1,673
|
|
|
-
|
|
$
|
64,847
|
|
Operating
expense
|
|
|
53,160
|
|
|
648
|
|
|
308
|
|
$
|
54,116
|
|
Net
income (loss)
|
|
|
7,576
|
|
|
521
|
|
|
(86
|
)
|
$
|
8,011
|
|
Depreciation
and amortization
|
|
|
5,320
|
|
|
370
|
|
|
-
|
|
$
|
5,690
|
|
Interest
expense
|
|
|
2,705
|
|
|
484
|
|
|
58
|
|
$
|
3,247
|
|
Income
tax expense (benefit) in operations income
|
|
|
5,129
|
|
|
210
|
|
|
(161
|
)
|
$
|
5,178
|
|
Assets
|
|
|
633,990
|
|
|
85,215
|
|
|
42,401
|
|
$
|
761,606
|
|
|
|
Three
Months Ended September 30, 2006
|
|
|
|
Water
Utility
Services
|
|
Real Estate
Services
|
|
All
Other*
|
|
SJW
Corp.
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
|
61,803
|
|
|
1,070
|
|
|
246
|
|
$
|
63,119
|
|
Operating
expense
|
|
|
50,688
|
|
|
565
|
|
|
465
|
|
$
|
51,718
|
|
Net
income
|
|
|
8,581
|
|
|
217
|
|
|
60
|
|
$
|
8,858
|
|
Depreciation
and amortization
|
|
|
5,251
|
|
|
238
|
|
|
19
|
|
$
|
5,508
|
|
Interest
expense
|
|
|
2,222
|
|
|
161
|
|
|
-
|
|
$
|
2,383
|
|
Income
tax expense (benefit) in operations income
|
|
|
6,063
|
|
|
168
|
|
|
(112
|
)
|
$
|
6,119
|
|
Assets
|
|
|
557,980
|
|
|
47,323
|
|
|
43,083
|
|
$
|
648,386
|
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
Water
Utility
Services
|
|
Real Estate
Services
|
|
All
Other*
|
|
SJW
Corp.
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
|
154,074
|
|
|
4,814
|
|
|
111
|
|
$
|
158,999
|
|
Operating
expense
|
|
|
132,640
|
|
|
2,162
|
|
|
997
|
|
$
|
135,799
|
|
Net
income
|
|
|
13,938
|
|
|
1,544
|
|
|
57
|
|
$
|
15,539
|
|
Depreciation
and amortization
|
|
|
15,919
|
|
|
1,049
|
|
|
7
|
|
$
|
16,975
|
|
Interest
expense
|
|
|
8,242
|
|
|
1,322
|
|
|
78
|
|
$
|
9,642
|
|
Income
tax expense (benefit) in operations income
|
|
|
9,789
|
|
|
875
|
|
|
(245
|
)
|
$
|
10,419
|
|
Assets
|
|
|
633,990
|
|
|
85,215
|
|
|
42,401
|
|
$
|
761,606
|
|
|
|
Nine
Months Ended September 30, 2006
|
|
|
|
Water
Utility
Services
|
|
Real Estate
Services
|
|
All
Other*
|
|
SJW
Corp.
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
|
140,727
|
|
|
3,105
|
|
|
902
|
|
$
|
144,734
|
|
Operating
expense
|
|
|
116,515
|
|
|
1,780
|
|
|
1,620
|
|
$
|
119,915
|
|
Net
income (loss)
|
|
|
18,599
|
|
|
972
|
|
|
(39
|
)
|
$
|
19,532
|
|
Depreciation
and amortization
|
|
|
15,323
|
|
|
602
|
|
|
59
|
|
$
|
15,984
|
|
Interest
expense
|
|
|
6,837
|
|
|
700
|
|
|
-
|
|
$
|
7,537
|
|
Income
tax expense (benefit) in operations income
|
|
|
12,350
|
|
|
647
|
|
|
(439
|
)
|
$
|
12,558
|
|
Assets
|
|
|
557,980
|
|
|
47,323
|
|
|
43,083
|
|
$
|
648,386
|
|
*The
“All
Other” category includes Crystal Choice Water Service LLC and, without regard to
its subsidiaries, SJW Corp. Please refer to Notes to Consolidated Financial
Statements in SJW Corp.’s 2006 Annual Report on Form 10-K.
Note
7. Long-Term
Liabilities
SJW
Corp.’s contractual obligations and commitments include senior notes, mortgages
and other obligations. San Jose Water Company, a subsidiary of SJW Corp., has
received advance deposit payments from its customers on construction projects.
Refunds of the advance deposit payments constitute an obligation of San Jose
Water Company.
Note
8. Adoption
of Financial Accounting Standards Board Interpretation No.
48
SJW
Corp.
adopted the provisions of Financial Accounting Standards Board Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes,” on January 1, 2007. As a
result, SJW Corp. recognized a decrease in its liability for unrecognized tax
benefits of approximately $448 which was recorded as an increase to the January
1, 2007 balance of retained earnings. The total amount of unrecognized tax
benefits, before the impact of deductions for state taxes, excluding interest
and penalties was $1,407 and $1,205 as of January 1, 2007 and September 30,
2007, respectively. The amount of tax benefits, net of any federal benefits
for
state taxes and inclusive of interest that would impact the effective rate,
if
recognized, is approximately $618 as of September 30, 2007.
SJW
Corp.’s policy is to classify interest and penalties associated with
unrecognized tax benefits, if any, in tax expense. Accrued interest expense,
net
of the benefit of tax deductions which would be available on the payment of
such
interest, is approximately $60 as of September 30, 2007. SJW Corp. has not
accrued any penalties for unrecognized tax benefits.
SJW
Corp.
anticipates that its unrecognized tax benefits balance will be reduced by
approximately $194 within the next 12 months following the adoption date of
January 1, 2007 due to the lapsing of statute of limitations. As of September
30, 2007 a total of $202 reduction was recorded to unrecognized tax benefits
as
a result of a lapse of the applicable statute of limitations.
SJW
Corp.
files U.S. federal income tax returns and income tax returns in various states.
The open tax years for the jurisdictions in which SJW Corp. files are as
follows:
Jurisdiction
|
|
Years
Open
|
Federal
|
|
2004
- 2006
|
California
|
|
2003
- 2006
|
Arizona
|
|
2006
|
Connecticut
|
|
2003
- 2006
|
Florida
|
|
2003
- 2006
|
Texas
|
|
2005
- 2006
|
Note
9. Debt
Issuance
On
January 23, 2007, San Jose Water Company issued $20,000 of unsecured Senior
Notes Series H, with an interest rate of 5.71% and interest-only payments until
maturity, which is January 1, 2037. Senior Note Series H has terms and
conditions that restrict San Jose Water 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. Proceeds from the sales
of
Senior Notes Series H were used to repay short-term borrowings and to fund
construction expenditures.
Note
10. Sale
of Business
On
January 31, 2007, the rental equipment and existing inventory of Crystal Choice
Water Service LLC was sold for $635 cash. The disposition of Crystal Choice
Water Service LLC assets is not material to the overall financial condition
of
SJW Corp. The segment in which Crystal Choice Water Service LLC is disclosed
under Note 6 of these financial statements is “All Other.”
Note
11. Commitment
On
April
17, 2006, San Jose Water Company entered into an agreement with Adobe Systems
Incorporated (“Adobe”) for Adobe to purchase approximately one acre of property
and buildings located in San Jose, California for a total purchase price of
approximately $4,000. The agreement includes an option for San Jose Water
Company to lease-back the buildings until June 2008. The transaction needs
to be
approved by the CPUC since the property and buildings are utility plant assets.
Since San Jose Water Company will retain more than a minor portion of the use
of
the property, the property will continue to be classified as a utility plant
asset rather than as an asset held-for-sale, in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.”
On
May
15, 2007, San Jose Water Company entered into an agreement to purchase a
building in downtown San Jose, California for a total purchase price of
approximately $6,700. The purchase is expected to close in the fourth quarter
of
2007.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(in
thousands, except share and per share data)
The
information in this Item 2 should be read in conjunction with the financial
information and the notes thereto included in Item 1 of this Form 10-Q
and the consolidated financial statements and notes thereto and the related
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” contained in SJW Corp.’s Annual Report on Form 10-K for the year
ended December 31, 2006.
This
report contains forward-looking statements within the meaning of the federal
securities laws relating to future events and future results of SJW Corp. and
its subsidiaries that are based on current expectations, estimates, forecasts,
and projections about SJW Corp. and the industries in which SJW Corp. operates
and the beliefs and assumptions of the management of SJW Corp. Such
forward-looking statements are identified by words including “expect,”
“estimate,” “anticipate,” “intends,” “plans,” “may,” “should,” “will,” and
similar expressions. These forward-looking statements are only predictions
and
are subject to risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual results may differ materially and adversely from
those expressed in any forward-looking statements. Important factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in this report and in other reports SJW Corp. files with the
Securities and Exchange Commission (“SEC”), specifically the most recent reports
on Form 10-K, Form 10-Q and Form 8-K, each as it may be amended
from time to time. SJW Corp. undertakes no obligation to update the information
contained in this report, including the forward-looking statements to reflect
any event or circumstance that may arise after the date of this
report.
General:
SJW
Corp.
is a holding company with four subsidiaries.
San
Jose
Water Company, a wholly owned subsidiary of SJW Corp., is a public utility
in
the business of providing water service to approximately 220,000
connections that serve a population of approximately one million people in
an area comprising about 138 square miles in the metropolitan San Jose,
California area.
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 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. San Jose Water Company
distributes water to customers in accordance with accepted water utility
methods, which include pumping from storage and gravity feed from high elevation
reservoirs. San Jose Water Company also provides nonregulated water related
services under agreements with municipalities. These nonregulated services
include full water system operations, billings and cash remittance
services.
San
Jose
Water Company has utility property including land held in fee, impounding
reservoirs, diversion facilities, wells, distribution storage and all water
facilities and other property necessary to provide utility service to its
customers. Under Section 851 of the Public Utilities Code, properties
currently used and useful in providing utilities services cannot be disposed
of
unless California Public Utilities Commission (“CPUC”) approval is
obtained.
San
Jose
Water Company also has approximately 1,500 acres of nonutility property which
has been identified as no longer used and useful in providing utility services.
Approximately 16 acres of the nonutility property are located in the
vicinity of the San Jose Metropolitan area. The remaining properties are located
in the hillside area adjacent to our watershed properties.
SJW
Land
Company, a wholly owned subsidiary of SJW Corp., owns the following
properties:
Description
|
|
Approximate
Acreage
|
|
Location
|
|
Approximate
Square
Footage
|
|
Three
commercial buildings
|
|
|
2
|
|
|
San
Jose, California
|
|
|
50,000
|
|
Warehouse
|
|
|
17
|
|
|
Windsor,
Connecticut
|
|
|
170,000
|
|
Warehouse
|
|
|
8
|
|
|
Orlando,
Florida
|
|
|
147,000
|
|
Retail
building
|
|
|
2
|
|
|
El
Paso, Texas
|
|
|
14,000
|
|
Warehouse
|
|
|
11
|
|
|
Phoenix,
Arizona
|
|
|
176,000
|
|
Warehouse
and commercial building
|
|
|
54
|
|
|
Knoxville,
Tennessee
|
|
|
494,000
|
|
Undeveloped
land
|
|
|
5
|
|
|
San
Jose, California
|
|
|
N/A
|
|
The
California properties include a 70% limited partnership interest in
444 West Santa Clara Street, L.P. The limited partnership has been
determined to be a Variable Interest Entity within the scope of FASB
Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest
Entities,” and as a result, it has been consolidated with SJW Land
Company.
Canyon
Lake Water Service Company (“CLWSC”) provides service to approximately 7,800
connections that serve approximately 22,000 residents in a service area
comprising more than 320 square miles in the rapidly growing region between
San
Antonio and Austin, Texas.
Crystal
Choice Water Service LLC was a subsidiary 75% owned by SJW Corp., engaged
in the sale and rental of water conditioning and purification equipment. On
January 31, 2007, the rental equipment and existing inventory of Crystal Choice
Water Service LLC was sold for $635 (see Item 1, Note 10, to the accompanying
unaudited condensed consolidated financial statements).
SJW
Corp.
also owns 1,099,952 shares of California Water Service Group, which represents
approximately 5% of its outstanding shares as of September 30,
2007.
Business
Strategy:
SJW
Corp.
focuses its business initiatives in four strategic areas:
(1) Regional
regulated water utility operations.
|
(2) |
Regional
nonregulated water utility related services provided in accordance
with
the guidelines established by the
CPUC.
|
(3) Real
estate investment activities in SJW Land Company.
(4) Out-of-region
water and utility related services, primarily in the Western United
States.
Regional
Regulated Activities
SJW
Corp.’s regulated utility operation is conducted through San Jose Water Company,
a wholly owned water utility subsidiary that provides water service to the
greater metropolitan San Jose area, and CLWSC, a 97.5% owned regulated water
utility subsidiary in the state of Texas. SJW Corp. plans and applies a diligent
and disciplined approach to improving and maintaining its water system
infrastructure. It also seeks to acquire regulated water systems adjacent to
or
near its existing service territory.
Regional
Nonregulated Activities
Operating
in accordance with guidelines established by the CPUC, San Jose Water Company
provides nonregulated water services under agreements with municipalities and
other utilities. Nonregulated services include water system operations, billings
and cash remittance processing, maintenance services, and telecommunication
antenna leasing.
San
Jose
Water Company also seeks appropriate nonregulated business opportunities that
complement its existing operations or that allow it to extend its core
competencies beyond existing operations. San Jose Water Company seeks
opportunities to fully utilize its capabilities and existing capacity by
providing services to other regional water systems, benefiting its existing
regional customers through increased efficiencies.
Real
Estate Investment
SJW
Land
Company’s real estate investments diversifies SJW Corp.’s asset base and
balances SJW Corp.’s concentration in regulated assets. SJW Land Company
implements its real estate investment strategy by exchanging selected real
estate assets for relatively low risk investments with a capital structure
and
risk and return profile that is consistent with SJW Corp.’s consolidated capital
structure and risk and return profile.
Out-of-Region
Opportunities
SJW
Corp.
is also pursuing opportunities to participate in out-of-region water and utility
related services, particularly regulated water businesses, in the Western United
States. SJW Corp. evaluates out-of-region and out-of-state opportunities that
meet SJW Corp.’s risk and return profile.
The
factors SJW Corp. considers in evaluating such opportunities
include:
|
·
|
regulatory
environment;
|
|
·
|
general
economic conditions;
|
|
·
|
potential
profitability;
|
|
·
|
additional
growth opportunities within the region;
|
|
·
|
water
quality and environmental issues; and
|
SJW
Corp.
cannot be certain it will be successful in consummating any transactions
relating to such opportunities. In addition, any transaction will involve
numerous risks. These include the possibility of paying more than the value
derived from the acquisition, the assumption of certain known and unknown
liabilities related to the acquired assets, the risk of diverting
management’s attention from normal daily operations of the business, negative
impact to SJW Corp.’s financial condition and operating results, the risks of
entering markets in which it has no or limited direct prior experience, and
the
potential loss of key employees of any acquired company. SJW Corp. cannot be
certain that any transaction will be successful and will not materially harm
its
operating results or financial condition.
Critical
Accounting Policies:
SJW
Corp.
has identified the accounting policies below as the policies critical to its
business operations and the understanding of the results of operations. The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and revenues and expenses during the reporting
period. SJW Corp. bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances.
The impact and any associated risks related to these policies on SJW Corp.’s
business operations is discussed throughout “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” where such policies
affect SJW Corp.’s reported and expected financial results. SJW Corp.’s critical
accounting policies are as follows:
Balancing
Account
Pursuant
to Section 792.5 of the California Public Utilities Code, a balancing account
must be maintained for each expense item for which revenue offsets have been
authorized. 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.
Within
its regulatory regime, the CPUC has established a balancing account mechanism
for the purpose of tracking the under-collection or over-collection associated
with expense changes and the revenue authorized by the CPUC to offset those
expense changes. A separate balancing account must be maintained for each offset
expense item (e.g., purchased water, purchased power and groundwater extraction
charges). The balancing account balance varies with the seasonality of the
water
utility business such that, during the summer months when the demand for water
is at its peak, the account tends to reflect an under-collection while, during
the winter months when demand for water is relatively lower, the account tends
to reflect an over-collection. 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. However, had the balancing account been recognized
in San Jose Water Company's financial statements, San Jose Water Company's
retained earnings would be decreased by the amount of the account
over-collection or increased by the amount of the account under-collection,
less
applicable taxes.
Revenue
Recognition
SJW
Corp.
recognizes its regulated and nonregulated revenue when services have been
rendered, in accordance with SEC Staff Accounting Bulletin 104, “Revenue
Recognition.”
Metered
revenue of San Jose Water Company and CLWSC (together referred to as the “Water
Utility Services”) include billing 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 Water Utility Services read the majority of its
customers’ meters on a bi-monthly basis and records its revenue based on its
meter reading results. Unbilled revenue from the last meter reading date to
the
end of the accounting period is estimated based on the most recent 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 the Water Utility Services estimates
are determined. As of September 30, 2007 and December 31, 2006, accrued unbilled
revenue was $18,711 and $11,067, respectively. Unaccounted-for water on a 12
month-to-date basis for September 30, 2007 and 2006 approximated 7.16% and
4.51%, respectively, as a percentage of production. The estimate is based on
the
results of past experience, the trend and efforts in reducing the Water Utility
Services’ unaccounted-for water through customer conservation, main replacements
and lost water reduction programs.
SJW
Corp.
recognizes its nonregulated revenue based on the nature of the nonregulated
business activities. Revenue from San Jose Water Company’s nonregulated utility
operations and billing or maintenance agreements are recognized when services
have been rendered. Revenue from SJW Land Company is recognized ratably over
the
term of the leases.
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 are incurred. Accounting for such
costs and credits is based on management’s judgment that it is probable that the
costs are recoverable in the future revenue of San Jose Water Company through
the ratemaking process. The regulatory assets and liabilities recorded by San
Jose Water Company primarily relate to the recognition of deferred income taxes
for ratemaking versus tax accounting purposes and the postretirement pension
benefits and medical costs that have not been passed through rates. The
disallowance of any asset in future ratemaking, including deferred regulatory
assets, would require San Jose Water Company to immediately recognize the impact
of the costs for financial reporting purposes. No disallowance has been
recognized as of September 30, 2007 and December 31, 2006. The net regulatory
assets recorded by San Jose Water Company as of September 30, 2007 and December
31, 2006 was $49,581 and $50,483, respectively.
Income
Taxes
SJW
Corp.
estimates its federal and state income taxes as part of the process of preparing
the financial statements. The process involves estimating the actual current
tax
exposure together with assessing temporary differences resulting from different
treatment of items for tax and accounting purposes, including the evaluation
of
the treatment acceptable in the water utility industry and regulatory
environment. These differences result in deferred tax assets and liabilities,
which are included within the balance sheet. If actual results, due to changes
in the regulatory treatment, or significant changes in tax-related estimates
or
assumptions or changes in law, differ materially from these estimates, the
provision for income taxes will be materially impacted.
Effective
January 1, 2007, SJW Corp. adopted FASB Interpretation No. 48 (“FIN
48”),“Accounting for Uncertainty in Income Taxes, ” as discussed in Item 1, Note
8 of SJW Corp.’s accompanying unaudited condensed consolidated financial
statements.
Pension
Accounting
San
Jose
Water Company offers a defined benefit plan, an Executive Supplemental
Retirement Plan and certain postretirement benefits other than pensions to
employees retiring with a minimum level of service. Accounting for pensions
and
other postretirement benefits requires an extensive use of assumptions about
the
discount rate, expected return on plan assets, the rate of future compensation
increases received by the employees, mortality, turnover, and medical
costs.
San
Jose
Water Company, through its Retirement Plan Administrative Committee managed
by
representatives from the unions and management, establishes investment
guidelines that require approximately 30% of the Plan investments be in bonds
or
cash and the remaining 70% in equity securities. As of December 31, 2006,
the plan assets consist of approximately 35% bonds, 7% cash and 58% equities.
Furthermore, equities are to be diversified by industry groups to balance for
capital appreciation and income. In addition, all investments are publicly
traded. San Jose Water Company uses an expected rate of return on plan assets
of
8% in its actuarial computation. The distribution of assets are not considered
highly volatile or sensitive to changes in market rates and prices.
The
plan
assets are marked to market at the measurement date. Unrealized market losses
on
pension assets, when they occur, are amortized over 13 years.
San
Jose
Water Company utilizes each plan’s projected benefit stream in conjunction with
the “above the median” Citigroup Pension Discount Curve, which is designed to
reflect Aa corporate bond rates, in determining the discount rate used in
calculating the pension and other postretirement benefit liabilities at the
measurement date.
Recognition
of Gain/Loss on Nonutility Property
In
compliance with the Uniform Systems of Accounts prescribed by the CPUC and
conforming to generally accepted accounting principles for rate-regulated public
utilities, the cost of retired utility plant, including retirement costs (less
salvage), is charged to accumulated depreciation and no gain or loss is
recognized for utility plant used and useful in providing water utility services
to customers.
Nonutility
property in San Jose Water Company is property that is neither used nor useful
in providing water utility services to customers and is excluded from the rate
base for rate-setting purposes. San Jose Water Company recognizes gain/loss
on
disposition of nonutility property in accordance with CPUC Code Section 790.
Nonutility property in SJW Land Company consists primarily of land and
buildings. Net gains or losses from the sale of nonutility property are recorded
as a component of other income (expense) in the consolidated statement of income
and comprehensive income.
Recent
Accounting Pronouncements:
Effective
January 1, 2007, SJW Corp. adopted FASB Interpretation No. 48 (“FIN 48”),
“Accounting for Uncertainty in Income Taxes, ” as discussed in Item 1, Note 8 of
SJW Corp.’s accompanying unaudited condensed consolidated financial
statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157 (“SFAS 157”), “Fair Value Measurements.” SFAS 157 defines fair value and
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS 157 does not require any new fair value measurements, however, for some
entities, the application of SFAS 157 will change their current practice. SFAS
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. SJW Corp. is in the process of evaluating the impact
of
this accounting standard.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial
Liabilities.” SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. SFAS 159 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
provided the entity also elects to apply the provisions of SFAS 157. SJW Corp.
is in the process of evaluating the impact of this accounting
standard.
Liquidity
and Capital Resources:
The
Water
Utility Services’ budgeted capital expenditures for 2007, exclusive of capital
expenditures financed by customer contributions and advances, are $55,916 with
capital expenditures concentrated in water main replacements and treatment
plants. In addition, the Water Utility Services has approximately $10,000 in
budgeted capital expenditures from 2006, primarily for the construction of
a
treatment plant, which was completed during the third quarter of 2007.
Approximately $18,000 will be spent to replace Water Utility Services mains
in
2007. Year-to-date capital expenditures as of September 30, 2007 are
approximately $52,800.
Water
Utility Services’ capital expenditures are incurred in connection with normal
upgrading and expansion of existing facilities and to comply with environmental
regulations. Water Utility Services expects to incur approximately $265,885
in
capital expenditures, which includes replacement of pipes and mains, and
maintaining existing water systems, over the next five years, exclusive of
customer contributions and advances. Water Utility Services’ 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 the utility plants normally exceed
company-financed additions by several million dollars as a result of new
facilities construction funded with 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.
Historically,
the Water Utility Services’ write-offs for uncollectible accounts represent less
than 1% of its total revenue. Management believes it can continue to collect
its
accounts receivable balances at its historical collection rate.
Sources
of Capital:
San
Jose
Water Company’s ability to finance future construction programs and sustain
dividend payments depends on its ability to maintain or increase internally
generated funds and attract external financing. The level of future earnings
and
the related cash flow from operations is dependent, in large part, upon the
timing and outcome of regulatory proceedings.
San
Jose
Water Company’s financing activity is designed to achieve a capital structure
consistent with regulatory guidelines of approximately 50% debt and 50% equity.
As of September 30, 2007, San Jose Water Company’s funded debt and equity were
47% and 53%, respectively.
Historically,
San Jose Water Company’s internally generated funds, which include allowances
for depreciation and deferred income taxes, have provided approximately 50%
of
the future cash requirements for San Jose Water Company’s capital expenditures.
Funding for its future capital expenditure program will be provided through
internally generated funds and long-term debt and will be consistent with the
regulator’s guidelines.
On
January 23, 2007, San Jose Water Company issued $20,000 of unsecured Senior
Notes Series H, with an interest rate of 5.71% and interest-only payments until
maturity, which is January 1, 2037. Proceeds from the sales of Senior Notes
Series H were used to repay short-term borrowings and to fund construction
expenditures. San Jose Water Company has outstanding $150,000 of unsecured
senior notes as of September 30, 2007. The senior note agreements of San Jose
Water Company generally have terms and conditions that restrict San Jose Water
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. As of September 30, 2007, San Jose Water Company’s
funded debt was 47% of total capitalization and the net income available for
interest charges was 418% of interest charges.
San
Jose
Water Company received a $2,007, 20-year 2.39% interest rate loan from the
Safe
Drinking Water State Revolving Fund (“SDWSRF”) which requires semi-annual
payments. San Jose Water Company issued a standby letter of credit with a
commercial bank in the amount of $2,000 in support of this loan.
In
2004,
the California Department of Water Resources approved San Jose Water Company’s
application for a second loan under the SDWSRF program. The loan is for
approximately $1,660 over a term of 20 years at an interest rate of 2.60%.
These
funds will be used for water treatment plant improvements to meet increasing
filtration standards. San Jose Water Company expects to receive the funding
of
this loan in 2007, when all documentation has been completed.
As
of
September 30, 2007, SJWTX Water, Inc. has outstanding $15,000 of unsecured
senior notes. The senior note agreement has terms and conditions that restrict
SJWTX Water, Inc. from issuing additional funded debt if (1) its funded debt
would exceed 66-2/3% of total capitalization, and (2) its net income available
for interest charges for the trailing 12-calendar-month period would be less
than 175% of interest charges. In addition, SJW Corp. is a guarantor of the
senior note which has terms and conditions that restrict SJW Corp. from issuing
additional funded debt if (1) the funded consolidated debt would exceed 66-2/3%
of total capitalization, and (2) the minimum net worth of SJW Corp. becomes
less
than $125,000 plus 30% of the Water Utility Services cumulative net income,
since December 31, 2005. As of September 30, 2007, SJW Corp. does not face
any
restrictions in issuing any future indebtedness as a result of these terms
and
conditions.
In
February 2007, SJW Land Company purchased approximately 54 acres of nonutility
property with an office and distribution facilities in Knoxville, Tennessee
by
reinvesting proceeds from the sale of nonutility property in the fourth quarter
of 2006 of approximately $31,261, in order to qualify the transaction under
Internal Revenue Code 1031. The total purchase price of the replacement property
was approximately $47,625. SJW Land Company also borrowed approximately $13,500
and utilized internal funds of approximately $2,864 in connection with the
purchase. The property is leased to a large retail company for 19
years.
SJW
Corp.
and its subsidiaries have unsecured lines of credit available allowing aggregate
short-term borrowings of up to $35,000 at rates that approximate the bank’s
prime or reference rate. At September 30, 2007, SJW Corp. and its subsidiaries
had available unused short-term bank lines of credit of $27,500. Cost of
borrowing averaged 6.33% for the first nine months of 2007. The lines of credit
will expire on June 1, 2008. SJW Corp. and its subsidiaries intend to borrow
funds in the fourth quarter of 2007. The debt will be used to repay the line
of
credit and to fund construction expenditures.
Results
of Operations:
Overview
SJW
Corp.’s consolidated net income for the three months ended September 30, 2007
was $8,011, a decrease of $847, or approximately 10%, from $8,858 in the third
quarter of 2006. For the nine months ended September 30, 2007, consolidated
net
income was $15,539, a decrease of $3,993, or approximately 20%, from $19,532
for
the same period in 2006.
Operating
Revenue
|
|
Operating
Revenue by Segment
|
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
September
30
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Water
Utility Services
|
|
$
|
63,174
|
|
$
|
61,803
|
|
$
|
154,074
|
|
$
|
140,727
|
|
Real
Estate Services
|
|
|
1,673
|
|
|
1,070
|
|
|
4,814
|
|
|
3,105
|
|
All
Other
|
|
|
-
|
|
|
246
|
|
|
111
|
|
|
902
|
|
|
|
$
|
64,847
|
|
$
|
63,119
|
|
$
|
158,999
|
|
$
|
144,734
|
|
The
change in operating revenue from the same period in 2006 was due to the
following factors:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
Sept.
30, 2007 vs. 2006
|
|
Sept.
30, 2007 vs. 2006
|
|
|
|
Increase/(decrease)
|
|
Increase/(decrease)
|
|
Utility:
|
|
|
|
|
|
|
|
|
|
Consumption
changes
|
|
$
|
(2,046
|
)
|
|
(3%
|
)
|
$
|
2,912
|
|
|
2%
|
|
New
customers increase
|
|
|
260
|
|
|
-
|
|
|
2,711
|
|
|
2%
|
|
Rate
increases
|
|
|
3,157
|
|
|
5%
|
|
|
7,723
|
|
|
5%
|
|
Real
Estate Services
|
|
|
603
|
|
|
1%
|
|
|
1,710
|
|
|
1%
|
|
All
Other
|
|
|
(246
|
)
|
|
-
|
|
|
(791
|
)
|
|
-
|
|
|
|
$
|
1,728
|
|
|
3%
|
|
$
|
14,265
|
|
|
10%
|
|
Operating
Expense
|
|
Operating
Expense by Segment
|
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
September
30
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Water
Utility Services
|
|
$
|
53,160
|
|
$
|
50,688
|
|
$
|
132,640
|
|
$
|
116,515
|
|
Real
Estate Services
|
|
|
648
|
|
|
565
|
|
|
2,162
|
|
|
1,780
|
|
All
Other
|
|
|
308
|
|
|
465
|
|
|
997
|
|
|
1,620
|
|
|
|
$
|
54,116
|
|
$
|
51,718
|
|
$
|
135,799
|
|
$
|
119,915
|
|
The
change in operating expenses from the same period in 2006 was due to the
following factors:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
Sept.
30, 2007 vs. 2006
|
|
Sept.
30, 2007 vs. 2006
|
|
|
|
Increase/(decrease)
|
|
Increase/(decrease)
|
|
Water
production costs:
|
|
|
|
|
|
|
|
|
|
Decreased
surface water supply
|
|
$
|
2,029
|
|
|
4%
|
|
$
|
7,378
|
|
|
6%
|
|
Change
in consumption usage and new customers
|
|
|
(1,218
|
)
|
|
(2%
|
)
|
|
3,832
|
|
|
3%
|
|
Groundwater
extraction charges and purchased water price increase
|
|
|
2,080
|
|
|
4%
|
|
|
3,070
|
|
|
3%
|
|
Other
|
|
|
151
|
|
|
-
|
|
|
280
|
|
|
-
|
|
Total
water production costs
|
|
|
3,042
|
|
|
6%
|
|
|
14,560
|
|
|
12%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonwater
production costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
and general
|
|
|
(57
|
)
|
|
-
|
|
|
960
|
|
|
1%
|
|
Other
operating expense
|
|
|
15
|
|
|
-
|
|
|
(111
|
)
|
|
-
|
|
Maintenance
|
|
|
139
|
|
|
-
|
|
|
1,298
|
|
|
1%
|
|
Property
taxes and other nonincome taxes
|
|
|
18
|
|
|
-
|
|
|
325
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
182
|
|
|
-
|
|
|
991
|
|
|
1%
|
|
Total
nonwater production costs
|
|
|
297
|
|
|
-
|
|
|
3,463
|
|
|
3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
(941
|
)
|
|
(1%
|
)
|
|
(2,139
|
)
|
|
(2%
|
)
|
Total
operating expenses
|
|
$
|
2,398
|
|
|
5%
|
|
$
|
15,884
|
|
|
13%
|
|
San
Jose
Water Company’s water supply consists of groundwater from wells, surface water
from watershed run off and diversion, and imported water purchased from Santa
Clara Valley Water District (“SCVWD”). Surface water is the least expensive
source of water and its availability will significantly impact the water
production costs of San Jose Water Company.
Water
production costs increased $3,042 and $14,560 for the third quarter and
year-to-date of 2007, respectively. The increase in water production costs
was
primarily attributable to $2,029 and $7,378 for the quarter and year-to-date,
respectively, in decreased surface water supply necessitating additional
purchased water and groundwater extraction charges from the SCVWD. The lack
of
precipitation this past winter adversely impacts the Water Utility Services’
operating results.
CLWSC’s
primary supply is water pumped from Canyon Lake at two lake intakes. This supply
is supplemented by groundwater pumped from wells.
Water
Utility Services’ water production for the three and nine months ended September
30, 2007 decreased 649 and increased 2,552 million gallons, respectively, from
the same periods in 2006. For the nine months ended September 30, 2007, more
purchased and groundwater were used when compared to the same period in
2006.
The
change in the Water Utility Services’ source of supply mix was as
follows:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
Sept.
30, 2007 vs. 2006
|
|
Sept.
30, 2007 vs. 2006
|
|
|
|
Increase/(decrease)
|
|
Increase/(decrease)
|
|
Purchased
water
|
|
|
(337
|
)
|
|
(2%
|
)
|
|
1,942
|
|
|
5%
|
|
Surface
water
|
|
|
(1,252
|
)
|
|
(7%
|
)
|
|
(4,510
|
)
|
|
(11%
|
)
|
Ground
water
|
|
|
970
|
|
|
5%
|
|
|
5,091
|
|
|
13%
|
|
Reclaimed
water
|
|
|
(30
|
)
|
|
-
|
|
|
29
|
|
|
-
|
|
|
|
|
(649
|
)
|
|
(4%
|
)
|
|
2,552
|
|
|
7%
|
|
The
changes in the source of supply mix were consistent with the changes in the
water production costs.
Quarterly
nonwater production costs increased $297 in the third quarter of 2007 from
2006
due to $182 in depreciation expense from increased real estate property and
utility plant and $139 in maintenance expenses. Administrative and general,
property taxes and other nonincome taxes and other operating expense decreased
by $24. Income tax expense decreased $941 due to lower taxable income in the
third quarter of 2007 versus the third quarter of 2006.
Year-to-date
nonwater production costs increased $3,463, or 3%, compared to 2006. The
increase is primarily attributable to a $1,298 increase in maintenance expenses
due to higher leak repairs, $991 in depreciation expense from increased real
estate property and utility plant, $960 in administrative and general costs,
and
taxes other than income and other expenses increased $214. Income tax expense
decreased $2,139 year-to-date for 2007 due to decreased taxable income. The
effective income tax rates for the periods ended September 30, 2007 and 2006
approximated 41%.
The
change in comprehensive income for the three and nine months ended September
30,
2007 and 2006 was due to the changes in market value of the investment in
California Water Service Group.
Water
Supply and Energy Resources
San
Jose
Water Company’s water supply is obtained from groundwater wells, local surface
water from watershed run off and diversion, and the purchase of imported treated
water from the SCVWD under the terms of a master contract with SCVWD expiring
in
2051. Groundwater level in 2007 remains comparable with 30-year normal
levels.
On
September 17, 2007, the SCVWD’s 10 reservoirs were 51% full with 86,412
acre-feet of water in storage. The rainfall in the season commencing July 1,
2007 was approximately 21% of historical season average.
Rainfall
at San Jose Water Company’s Lake Elsman was measured at .25 inches for the
season commencing July 1, 2007 through June 30, 2008, which is typical for
this
normal dry time of year. Local surface water is a less costly source of water
than groundwater or purchased water and its availability significantly impacts
San Jose Water Company’s results of operations.
Based
on
information provided by SCVWD in its Water Utility Enterprise Report, San Jose
Water Company believes that its various sources of water supply are sufficient
to meet customer demand for the immediate foreseeable future.
To
the
extent that San Jose Water Company has to pump water from wells during peak
periods to satisfy customer demand when imported water is insufficient, higher
energy costs 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
June
12, 2007, SCVWD issued a statement urging county residents and businesses to
voluntarily cut back their water use by ten percent (10%). SJW Corp. continues
to encourage its customers to use water wisely and has active programs in place
to help customers achieve savings.
On
August
31, 2007, US District Court Judge Oliver Wanger issued a ruling which will
result in a court order to reduce the amount of water pumped from the San
Joaquin-Sacramento River Delta, during the breeding season of the Delta Smelt,
which commences in December and ends in June. While we do not believe this
decision will have a near term impact on our water supply, its impact on future
periods is uncertain. SCVWD has advised us that it is working with various
relevant parties to understand the full implication of the resultant court
order, including its impact on the water allocation to SCVWD.
CLWSC
has
long-term contracts with the Guadalupe-Blanco River Authority (“GBRA”). The
terms of the agreements expire in 2044 and 2050. The agreements provide CLWSC
with 6,000 acre-feet of water annually from Canyon Lake at prices to be adjusted
periodically by the GBRA.
Regulatory
Affairs
Almost
all of 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 specified
return on common equity. The timing of rate decisions could have an impact
on
the results of operations.
On
November 9, 2006, the CPUC issued San Jose Water Company’s most recent general
rate case decision (D.06-11-015). The decision granted San Jose Water Company
authority to increase rates by $3,488 or 2.00% in 2007, $5,402 or 3.02% in
2008,
and $3,959 or 2.15% in 2009. The decision also authorizes additional rate
recoveries to be phased in as capital projects are completed over the three-year
period and the recovery of approximately $450 from San Jose Water Company’s
balancing and memorandum accounts. These rate increases are designed to produce
a return on common equity of 10.13%, which is comparable with recent authorized
returns for water utilities in California.
Pursuant
to this general rate case decision, on January 1, 2007, San Jose Water Company
was authorized a revenue increase of $3,488, or 2.00%, designed to recover
projected operating cost increases for 2007. Also pursuant to D.06-11-015,
on
April 12, 2007, the CPUC authorized a $1,568 revenue increase to recover
additional plant additions originally authorized in D.06-11-015.
Effective
July 9, 2007, the CPUC approved San Jose Water Company’s request for a revenue
increase of $5,409. The request was the result of the increased cost of
purchased water and higher groundwater extraction costs charged to San Jose
Water Company by the SCVWD.
On
January 22, 2007, San Jose Water Company filed an application with the CPUC
requesting the approval of the sale of its main office facility pursuant to
Public Utilities Code Section 851, and the authorization of the subsequent
reinvestment of the sales proceeds in water utility infrastructure under Public
Utilities Code Section 790. In addition to the reinvestment of the sale
proceeds, San Jose Water Company has proposed to make additional investments
to
upgrade utility facilities, which would result in a rate increase of $1,871
or
approximately 1.05% over current rates. In the application, San Jose Water
Company is proposing to sell its main office property and relocate the
headquarters offices and walk-in customer service center functions to a new
downtown San Jose location, while consolidating all other operations at San
Jose
Water Company’s existing Bascom Avenue location. This request is still pending
before the CPUC.
In
San
Jose Water Company’s general rate case decision D.06-11-015, the CPUC required
that San Jose Water Company file an application containing a proposal for the
implementation of a conservation rate structure. Subsequently, on March 19,
2007, San Jose Water Company submitted the required filing containing a proposal
for the implementation of a conservation rate structure via tiered rates as
well
as the establishment of a Water Revenue Adjustment Mechanism. The filing also
included requests for the establishment of a memorandum account for conservation
expenses, the establishment of a full cost balancing account for water supply
expense, and the expansion of San Jose Water Company’s existing water quality
memorandum account. The proposed tiered rate structure will be applicable to
all
residential customers for all meter sizes. If approved as proposed, the average
residential user will see a modest reduction in their water bill, while
customers with usage at 20 ccf and above will begin to see increases in their
bills which progressively reflect the third tier rate. There will be no changes
to the monthly service charges, and all other customers will remain under the
current single tiered rates. The filing is currently being reviewed by the
CPUC
and any changes to the rate structure will likely not become effective until
sometime during 2008.
On
November 1, 2006, San Jose Water Company filed with the CPUC requesting
implementation of a rate increase for the Mountain District (formerly Redwood
Mutual Water Company). In accordance with the Agreement for Purchase and Sale
of
Water System between Redwood Mutual Water Company and San Jose Water Company,
the service charge will be increased by 2.0% and the Quantity Rate will be
increased by 10.3% over the 2006 water rates originally established by the
Redwood Mutual Water Company. This rate increase was ultimately authorized,
effective June 21, 2007. Additionally, effective July 30, 2007, San Jose Water
Company was authorized two surcharges in the Mountain District to recover the
increased cost of purchased water and higher groundwater extraction costs
charged to San Jose Water Company by the SCVWD.
On
October 12, 2007, CLWSC filed its first rate case with the Texas Commission
on
Environmental Quality with new rates to become effective on December 14, 2007.
As part of the acquisition agreement, the rate increase request for CLWSC was
limited to 10% or approximately $451.
Balancing
Account Recovery Procedures
As
of
September 30, 2007 and December 31, 2006, the total accrued balance in San
Jose
Water Company’s balancing account was an over-collection of $1,094 and $739,
respectively, including interest. The balance for the period November 29, 2001
to December 31, 2004 has been reviewed and authorized for rate recovery by
the
CPUC. All the memorandum type balancing accounts will be reviewed by the CPUC
in
San Jose Water Company’s next general rate case. The balances are summarized as
follows:
|
|
September
30, 2007
|
|
December 31, 2006
|
|
Under-collected
balancing account 11/29/2001 to 12/31/2004, including surcharge
and
interest
|
|
$ |
140
|
|
$ |
402
|
|
Over-collected
memorandum type balancing account 1/1/2005 to 12/31/2005
|
|
|
(152
|
)
|
|
(146
|
)
|
Over-collected
memorandum type balancing account 1/1/2006 to 12/31/2006
|
|
|
(1,034
|
)
|
|
(995
|
)
|
Over-collected
memorandum type balancing account 1/1/2007 to 6/30/2007
|
|
|
(48
|
)
|
|
-
|
|
Net
over-collected balancing account
|
|
$
|
(1,094
|
)
|
$ |
(739
|
)
|
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.
SJW
Corp.
has no material 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
SJW
Corp.’s management, with the participation of SJW Corp.’s Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the SJW
Corp.’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 SJW Corp.’s disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act
of 1934, as amended, or “the Act”) 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 SJW Corp. in the
reports that it files or submits under the Act is recorded, processed,
summarized, and reported, within the time periods specified in the SEC’s rules
and forms, and that such information is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. SJW Corp. 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.
There
has
been no change in internal control over financial reporting during the third
fiscal quarter of 2007 that has materially affected, or is reasonably likely
to
materially affect, the internal controls over financial reporting of SJW
Corp.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
SJW
Corp.
is subject to ordinary routine litigation incidental to its business. There
are
no pending legal proceedings to which SJW Corp. 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 SJW Corp.’s business, financial position, results of
operations or cash flows.
ITEM
5. OTHER INFORMATION
On
October 25, 2007, the Board of Directors of SJW Corp. declared the regular
quarterly dividend of $0.15125 per common share. The dividend will be paid
on
December 1, 2007 to shareholders of record as of the close of business on
November 5, 2007.
ITEM
6. EXHIBITS
See
Exhibit Index located immediately following the Certification 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 on September 30,
2007.
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 2, 2007
|
|
By
|
|
/s/
ANGELA YIP
|
|
|
|
|
Angela
Yip
|
|
|
|
|
Chief
Financial Officer and Treasurer
|
|
|
|
|
(Principal
financial officer)
|
EXHIBIT
INDEX
Exhibit
No.
|
|
Description
of Document
|
|
|
|
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.