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 September 30, 1997 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 95196 (Address of principal executive offices) (Zip Code) 408-279-7810 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No APPLICABLE ONLY TO CORPORATE ISSUERS: Common shares outstanding as of November 12, 1997 and as of the date of this report are 3,170,347. PART 1. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS SJW CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (In thousands, except per share amounts) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1997 1996 1997 1996 Operating revenue $ 34,037 33,387 86,378 79,837 Operating expense: Operation: Purchased water 7,240 7,081 20,415 15,848 Power 1,657 1,695 3,140 3,573 Pump taxes 6,002 5,470 11,097 12,336 Other 4,601 4,470 13,287 12,914 Maintenance 1,745 1,658 5,319 5,036 Property and other nonincome taxes 810 800 2,475 2,358 Depreciation 2,195 2,133 6,584 6,399 Income taxes 3,588 3,654 8,551 7,345 Total operating expenses 27,838 26,961 70,868 65,809 Operating income 6,199 6,426 15,510 14,028 Gain on sale of non-utility property, net of tax - 5,269 - 5,269 Other income 225 212 624 654 Dividend income 290 286 870 858 Interest and other charges (1,560) (1,614) (4,720) (4,821) Net income $ 5,154 10,579 12,284 15,988 Earnings per share of common stock $ 1.63 3.26 3.87 4.93 Dividends per share of common stock $ 0.57 .555 1.71 1.665 Weighted average out- standing common shares $3,170,347 3,244,547 3,170,347 3,245,413 SJW CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (In thousands) SEPTEMBER 30 DECEMBER 31 1997 1996 ASSETS Utility plant $ 358,821 342,368 Less accumulated depreciation 113,588 107,584 Net utility plant 245,233 234,784 Nonutility property 7,330 7,287 Current assets: Cash and equivalents 15,673 11,904 Accounts receivable and accrued revenue 12,445 7,747 Prepaid expenses and other 1,490 1,219 Total current assets 29,608 20,870 Other assets: Investment in California Water Service Co. 27,190 23,099 Debt issuance and reacquisition costs 4,027 4,143 Regulatory asset 3,711 3,711 Goodwill 2,106 2,170 Other 531 472 Total other assets 37,565 33,595 $319,736 296,536 CAPITALIZATION AND LIABILITIES Capitalization: Common stock $ 9,907 9,907 Additional paid-in capital 19,235 19,235 Retained earnings 94,829 87,966 Unrealized gain (loss) on investment 5,334 2,920 Total common shareholders' equity 129,305 120,028 Long-term debt, less current maturities 75,000 75,000 Total capitalization 204,305 195,028 Current liabilities: Current maturities of long-term debt - 1,500 Accounts payable 954 315 Accrued interest 1,644 2,665 Accrued pump taxes and purchased water 4,012 1,992 Income and nonincome taxes payable 3,223 196 Other current liabilities 3,664 2,286 Total current liabilities 13,497 8,954 Deferred income taxes and tax credits 20,594 18,417 Other noncurrent liabilities 3,376 2,961 Advances for and contributions in aid of construction 77,964 71,176 $319,736 296,536 SJW CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (In thousands) NINE MONTHS ENDED SEPTEMBER 30 1997 1996 Operating activities: Net income $12,284 15,988 Adjustments to reconcile net income to net Cash provided by operating activities: Depreciation 6,584 6,399 Deferred income taxes and credits 2,177 713 Gain on sale of nonutility property - (7,424) Changes in operating assets and liabilities: Accounts receivable and accrued revenue (4,698) (3,629) Prepaid expenses and other (271) (163) Accounts payable and other current liabilities 2,017 830 Accrued pump taxes and purchased water 2,020 132 Income and nonincome taxes payable 3,027 4,447 Accrued interest (1,021) (473) Other changes, net (909) (840) Net cash provided by operating activities 21,210 15,980 Investing activities: Additions to utility plant (17,643) (14,542) Additions to nonutility property (26) (1,065) Cost to retire utility plant (329) (184) Temporary investments - 475 Net cash proceeds from sale of non-utility property - 7,767 Net cash used in investing activities (17,998) (7,549) Financing activities: Dividends paid (5,421) (5,403) Retirement of long-term debt (1,500) 0 Advances and contributions in aid of construction 8,566 6,106 Refunds of advances (1,088) (1,015) Net cash provided by (used in) financing activities 557 (312) Net change in cash and equivalents 3,769 8,119 Cash and equivalents, beginning of period 11,904 7,414 Cash and equivalents, end of period $ 15,673 15,533 Supplemental disclosures of cash flow information: Cash paid (credited) during period for: Interest $ 5,521 5,053 Income taxes $ 5,503 5,843 SJW CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1997 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 1996 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: On June 1, 1997, San Jose Water Company redeemed at maturity Series P 6.5% First Mortgage Bonds in the amount of $1,500,000 plus accrued interest. San Jose Water Company has 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. At September 30, 1997, San Jose Water Company had available an unused short-term bank line of credit of $20,000,000. 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 and source of supply facilities and to comply with environmental regulations. Net capital expenditures for 1997 are estimated at $18,002,000. For the five year period from 1997 to 2001, San Jose Water Company's net capital expenditures are estimated to aggregate $100,000,000. 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 nonutility activities. San Jose Water Company is a public utility in the business of providing water service to approximately 944,000 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. SJW Corp. owns 549,976 shares of California Water Service Company. Results of Operations: Overview SJW Corp.'s consolidated net income for the third quarter of 1997 was $5,154,000, a decrease of 51% from $10,579,000 in the third quarter of 1996. Included in third quarter 1996 results was a nonrecurring gain on sale of land of $5,269,000. Earnings for the nine months of 1997 were favorably impacted by an increase in customer consumption over the same period in 1996. Operating Revenue The change in consolidated operating revenue from the same period in 1996 was due to the following factors: Operating revenue Three months Nine Months ended September 30, 1997 vs. 1996 Increase/(decrease) Utility: Consumption $ 9,000 0.0% 3,616,000 4.5% New customers 149,000 0.5 369,000 0.5 Step rate increase 316,000 0.9 2,195,000 2.7 Other 176,000 0.5 361,000 0.5 $650,000 1.9% 6,541,000 8.2% Average usage per metered customer in the third quarter of 1997 was about the same as the third quarter of 1996. Year- to-date metered customer usage increased 11% over the same period in 1996. Operating expense The change in consolidated operating expense, excluding income taxes, from the same period in 1996 was due to the following: Operating expense Three months Nine Months ended September 30, 1997 vs. 1996 Increase/(decrease) Operation and maintenance $871,000 3.7% 3,551,000 6.1% General Taxes 62,000 0.3 185,000 0.3 Depreciation 10,000 0.0 117,000 0.2 $943,000 4.0% 3,853,000 6.6% The higher operation and maintenance expense was attributable to increased water production cost due to higher water consumption. The increase in production cost was partially offset by lower purchased power cost and higher availability of non-contract water at reduced cost from the Santa Clara Valley Water District. Other Income taxes on operations and the effective income tax rate in the third quarter of 1997 was about the same as the third quarter of 1996. Year-to-date income taxes on operations increased $1,206,000, or 16%. The effective income tax rate on operations increased from 34.3% in 1996 to 35.5% in 1997 due to higher taxable income and graduated tax rate. Since the water business is highly seasonal in nature, a comparison of the revenue and expense of the current quarter with the immediately preceding quarter would not be meaningful. Results of the first nine months of 1997 may not be indicative of results for the full year. San Jose Water Company entered into a 25-year lease agreement to operate the City of Cupertino's municipal water system effective October 1, 1997. The City of Cupertino's municipal water system has 4,200 service connections and is adjacent to the northern section of the San Jose Water Company's service area. San Jose Water Company paid a one-time concession fee of $6.8 million to the City of Cupertino, and will receive all payments for water service and assume responsibility for all maintenance, operating and capital costs. Water Supply On November 1, 1997, Santa Clara Valley Water District's 10 reservoirs were 47% full with 80,637 acre feet of water in storage -- which is average for the past 20 years. While at the same time, the water level in the Santa Clara ground water basin and the year to date rainfall approximated the 30-year average. Regulatory Affairs The Public Utilities Commission of California rendered a rate decision on July 17, 1996, approving .95%, 2.1%, 1.45% and 1.45% rate increases for 1996, 1997, 1998, and 1999, respectively, for San Jose Water Company. These rate increases are based on rates of return on rate base 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. Included in the rate increase is recovery of the voluntary conservation memorandum account for the period of March 1993 to February 1994 when San Jose Water Company experienced residual voluntary water conservation from an earlier water use restriction. On January 9, 1997, San Jose Water Company received a step rate increase in the amount of $1,212,000 or 1%. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS In October 1993, Valley Title Company and its insurer filed a lawsuit in Santa Clara County Superior Court naming San Jose Water Company as a defendant. Plaintiffs claimed a fire service pipeline ruptured in October 1992, causing water to flood the title company's basement. Stored heating oil was released. In April 1995, San Jose Water Company's insurance carrier settled the building damage claim for $3.5 million. Whether or not San Jose Water Company will be compelled to contribute to the settlement is uncertain. However, management has consistently maintained that the pollution exclusion asserted by its insurance carrier does not apply to this type of incident. Therefore, the company will aggressively resist any demand for contribution. The jury awarded the title company $3 million for its loss of title records, and the insurance carrier for San Jose Water Company appealed that decision. In September 1997, the Appellate Court rendered an unanimous decision in favor of San Jose Water Company by reversing the judgment. The title company is expected to appeal further. San Jose Water Company believes that any final award to the title company will be within the stated limits of the company's insurance coverage. On June 27, 1995, the City of San Jose passed an ordinance imposing a franchise fee on the gross annual receipts arising from the use, operation, or possession of a "Potable Water Franchise." This ordinance became effective on July 28, 1995. San Jose Water Company maintains that it has a "constitutional franchise" dating from at least 1891, and that the City of San Jose cannot legally impose any new franchise or new franchise fees on San Jose Water Company's operations. San Jose Water Company filed suit to challenge this new city ordinance. San Jose Water Company expects to be able to collect the franchise fee from its customers by surcharge in the event that its efforts to invalidate the ordinance are unsuccessful. In March 1997, a judgment in favor of San Jose Water Company was rendered in the trial court. The City has appealed the decision. San Jose Water Company does not believe, based upon all available information, that the passage of the ordinance will have a material effect on its financial position. Item 5. OTHER INFORMATION On October 16, 1997, the Board of Directors declared the regular quarterly dividend of $.57 per common share. The dividend will be paid December 1, 1997 to shareholders of record as of the close of business on November 1, 1997. 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 September 30, 1997. (b.) Reports on Form 8-K No reports on Form 8-K have been filed during the quarter ended September 30, 1997. 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 12, 1997 By /s/ Angela Yip Chief Financial Officer