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, 2001 --------------------------------------------- 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) 408-279-7800 - ---------------------------------------------------------------- (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 --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Common shares outstanding as of November 1, 2001 and as of the date of this report are 3,045,147. PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS -------------------- SJW CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) (In thousands, except share and per share data) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 2001 2000 2001 2000 - -------------------------------------------------------------------- Operating revenue $44,182 39,181 $104,791 95,782 Operating expenses: Operation: Purchased water 11,625 10,321 26,593 23,151 Power 2,196 1,510 4,971 3,217 Pump taxes 7,165 6,261 16,145 13,938 Other 5,474 5,524 16,777 18,320 Maintenance 1,830 1,735 5,218 5,230 Property and other nonincome taxes 1,111 1,027 3,272 3,025 Depreciation and amortization 3,319 2,962 9,928 8,885 Income taxes 3,515 3,457 6,013 6,558 - -------------------------------------------------------------------- Total operating expenses 36,235 32,797 88,917 82,324 - -------------------------------------------------------------------- Operating income 7,947 6,384 15,874 13,458 Dividend income 307 302 920 907 Interest and other charges (2,025) (1,899) (6,081) (5,640) Other income 166 173 530 284 - -------------------------------------------------------------------- Net income $6,395 4,960 $11,243 9,009 ==================================================================== Other comprehensive income (loss): Unrealized gain(loss) on investment 1,485 2,750 - (3,919) Income taxes related to other comprehensive income (loss) (609) (1,128) - 1,607 - -------------------------------------------------------------------- Other comprehensive income (loss), net 876 1,622 - (2,312) - -------------------------------------------------------------------- Comprehensive income $7,271 6,582 $11,243 6,697 ==================================================================== Basic earnings per share $ 2.10 1.63 $3.69 2.96 Comprehensive income per share $ 2.39 2.16 $3.69 2.20 Dividends per share $ 0.65 0.62 $1.92 1.85 Weighted average shares outstanding 3,045,147 3,045,147 3,045,147 3,045,147 See accompanying Notes to Condensed Consolidated Financial Statements. SJW CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands) SEPTEMBER 30 DECEMBER 31 2001 2000 - --------------------------------------------------------------------- ASSETS Utility plant and intangible assets $500,785 462,892 Less accumulated depreciation and amortization 148,339 139,396 - --------------------------------------------------------------------- Net utility plant 352,446 323,496 Nonutility property 10,228 9,979 Current assets: Cash and equivalents 2,098 783 Accounts receivable 9,065 6,425 Accrued revenue 12,642 6,700 Prepaid expenses and other 1,611 1,344 - --------------------------------------------------------------------- Total current assets 25,416 15,252 Other assets: Investment in California Water Service Group 29,699 29,699 Investment in joint venture 1,208 1,237 Debt issuance and reacquisition costs 3,683 3,719 Regulatory assets 5,273 5,256 Goodwill 1,765 1,829 Other 1,845 1,463 - --------------------------------------------------------------------- Total other assets 43,473 43,203 - --------------------------------------------------------------------- $431,563 391,930 ===================================================================== CAPITALIZATION AND LIABILITIES Capitalization: Common stock $ 9,516 9,516 Additional paid-in capital 12,357 12,357 Retained earnings 121,628 116,232 Accumulated other comprehensive income 6,220 6,220 - --------------------------------------------------------------------- Shareholders' equity 149,721 144,325 Long-term debt 110,000 90,000 - --------------------------------------------------------------------- Total capitalization 259,721 234,325 Current liabilities: Line of credit - 11,200 Accrued interest 2,057 2,789 Accounts payable and purchased power 5,630 1,134 Accrued pump taxes and purchased water 8,392 4,629 Accrued taxes 6,035 266 Refund due to customers 814 1,072 Other current liabilities 3,492 5,652 - --------------------------------------------------------------------- Total current liabilities 26,420 26,742 Deferred income taxes and tax credits 26,753 24,713 Advances for and contributions in aid of construction 112,812 100,222 Other noncurrent liabilities 5,857 5,928 - --------------------------------------------------------------------- $431,563 391,930 ===================================================================== See accompanying Notes to Condensed Consolidated Financial Statements. SJW CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) NINE MONTHS ENDED SEPTEMBER 30 2001 2000 - --------------------------------------------------------------------- Operating activities: Net income $11,243 9,009 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,928 8,885 Deferred income taxes and credits 2,040 (2,003) Changes in operating assets and liabilities: Accounts receivable and accrued revenue (8,582) (5,735) Prepaid expenses and other (267) (601) Accounts payable and other current liabilities 2,336 3,838 Accrued pump taxes and purchased water 3,763 4,304 Accrued taxes payable 5,769 (717) Accrued interest (732) (733) Other changes, net (470) 3,155 - --------------------------------------------------------------------- Net cash provided by operating activities 25,028 19,402 - --------------------------------------------------------------------- Investing activities: Additions to utility plant (39,701) (23,511) Additions to nonutility property (249) (47) Cost to retire utility plant (300) (418) - --------------------------------------------------------------------- Net cash used in investing activities (40,250) (23,976) - --------------------------------------------------------------------- Financing activities: Dividends paid (5,847) (5,618) Net borrowings on line of credit (11,200) 5,000 Advances and contributions in aid of construction 14,794 7,913 Refunds of advances (1,210) (1,216) Proceeds from issuance of long-term debt 20,000 - - --------------------------------------------------------------------- Net cash provided by financing activities 16,537 6,079 - --------------------------------------------------------------------- Net change in cash and equivalents $1,315 1,505 Cash and equivalents, beginning of period 783 124 - --------------------------------------------------------------------- Cash and equivalents, end of period $2,098 1,629 ===================================================================== Supplemental disclosures of cash flow information: Cash paid during period for: Interest 6,686 6,298 Income taxes (973) 8,448 See accompanying Notes to Condensed Consolidated Financial Statements. SJW CORP. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2001 (dollars in thousands) 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 2000 Annual Report on Form 10-K should be read with the accompanying condensed consolidated financial statements. Basic earnings per share and comprehensive income per share is calculated using income available to common shareholders and comprehensive income, respectively, divided by the weighted average number of shares outstanding during the year. SJW Corp. has no dilutive securities, and accordingly, diluted earnings per share are not shown. SJW Corp. and its subsidiaries operate predominantly in one reportable business segment of providing water utility service to its customers. Nonutility revenue, assets, and net income do not have a material effect on the corporation's financial condition and results of operations. NOTE II - CRYSTAL CHOICE WATER SERVICE LLC SJW Corp.'s condensed consolidated financial statements for the three and nine months ended September 30, 2001 include the operating results of Crystal Choice Water Service LLC (CCWS) from January 18, 2001 (inception). CCWS engages in the sale and rental of water conditioning equipment. SJW Corp., which has a 75% interest in CCWS intends to invest $850 in the first year of operation. Intercompany transactions and balances have been eliminated. The CCWS operation is not expected to be material to the overall financial position and operating results of SJW Corp. NOTE III - THE MERGER On October 28, 1999, SJW Corp. and American Water Works Company, Inc. (American Water) entered into an Agreement and Plan of Merger (Merger Agreement). SJW Corp. and American Water filed a joint application with the CPUC requesting its approval to complete the transaction. On February 20, 2001, the California Public Utility Commission (CPUC) issued a revised schedule for consideration of the proposed merger that would allow for a decision in September 2001. Following the ruling setting forth the new schedule, American Water announced that it would terminate the Merger Agreement on April 28, 2001, the date after which either party had the right to terminate the Merger Agreement, because of regulatory uncertainties and delays, and offered to consent to mutual termination of the agreement. On March 1, 2001, SJW Corp.'s Board of Directors decided that it would be in the best interest of the company to terminate the Merger Agreement, and accepted American Water's offer for mutual termination. NOTE IV - ISSUANCE OF LONG-TERM DEBT In September 2001, San Jose Water Company issued $20,000 in Series F 7.2% unsecured 30 year Senior Notes. Proceeds from the sale of unsecured Senior Notes are used to repay short-term borrowings and fund construction expenditures. NOTE V - IMPACT OF RECENT ACCOUNTING PRONOUCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". Statement No. 141 addresses the accounting for and reporting of business combinations and supercedes APB Opinion No. 16 "Business Combinations", and FASB Statement No. 38 "Accounting for preacquisition Contingencies of Purchased Enterprises". Statement No. 141 requires that all business combinations be accounted for using the purchase method of accounting for acquisitions and eliminates the use of the pooling method. This Statement applies to all business combinations initiated after June 30, 2001. SJW Corp. does not anticipate that the adoption of Statement No. 141 will have a material effect on its consolidated financial statements. Statements No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supercedes APB Opinion 17, "Intangible Assets". Statement No. 142 changes the accounting for goodwill from an amortization method to an impairment- only method. The amortization of goodwill, including goodwill recorded in past business combinations will cease upon adoption of the statement, which will begin with the SJW Corp.'s fiscal year starting January 1, 2002. However, goodwill and intangible assets acquired after June 30, 2001, will be subject to immediate adoption of the statement. The company will continue to amortize its goodwill during the remainder of fiscal 2001, the amount of which will be approximately $43 for the second half of the year. The resulting balance for existing goodwill and other intangible assets as of December 31, 2001 subject to periodic impairment testing will be $1,743. If in a future period, the company determines that goodwill or another intangible asset is impaired, the impairment write down could have a material impact on earnings for that period. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which applies to legal obligations that are associated with the retirement of long- lived assets and the associated asset retirement costs. The statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. SJW Corp. does not anticipate the adoption of SFAS No.143 will have a material effect on SJW Corp's financial condition and results of operation. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets". This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The statement is effective for financial statements issued for fiscal years beginning after December 15, 2001. SJW Corp. does not anticipate the adoption of SFAS No. 144 will have a material impact on SJW Corp's financial condition and results of operation. Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollars in thousands): This report contains forward looking statements relating to future events and financial performance of the company. Such forward looking statements are identified by words including "expect", "estimate", "anticipate", and similar expressions. The company's actual results could differ materially from those discussed in such forward looking statements. General: SJW Corp. was incorporated in California on February 8, 1985. SJW is a holding company with two wholly owned subsidiaries, San Jose Water Company and SJW Land Company. San Jose Water Company was originally incorporated under the laws of the State of California in 1866. The company was later reorganized and reincorporated as the San Jose Water Works. San Jose Water Works was reincorporated in 1985 as San Jose Water Company, with SJW Corp. as the parent holding company. The headquarters of SJW Corp. and its subsidiaries is at 374 West Santa Clara Street, San Jose, California 95113 and their telephone number is (408) 279-7800. San Jose Water Company is a public utility in the business of providing water service to a population of approximately 985,000 in an area comprising about 138 square miles in the metropolitan San Jose 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 in the cities of Campbell, Monte Sereno, Saratoga and the Town of Los Gatos, and adjacent unincorporated territory, all in the County of Santa Clara in the State of California. It distributes water to customers in accordance with accepted water utility methods, which include pumping from storage and gravity feed from high elevation reservoirs. SJW Land Company was incorporated in October 1985. SJW Land Company owns and operates parking facilities adjacent to the San Jose Arena, commercial buildings in San Jose and a 70% limited partnership interest in 444 West Santa Clara Street, L. P. In January 2001, SJW Corp. formed Crystal Choice Water Service LLC (CCWS), a limited liability company with Kinetico, Incorporated, a leading water conditioning equipment manufacturer. SJW Corp. owns 75% of the entity. CCWS engages in the sale and rental of water conditioning equipment. The CCWS operation is not expected to be material to the overall financial position and operating results of SJW Corp. SJW Corp. also owns 1,099,952 shares of California Water Service Group. Liquidity and Capital Resources: SJW Corp. and its subsidiaries have unsecured lines of credit available allowing aggregate short-term borrowings of up to $30,000 at rates which approximate the bank's prime or reference rate. At September 30, 2001, SJW Corp. and its subsidiaries had no short-term borrowings. In September 2001, San Jose Water Company issued $20,000 in Series F 7.2% unsecured 30 year Senior Notes. Proceeds from the sale of unsecured Senior Notes are used to repay short-term borrowings and fund construction expenditures through the remainder of the year. 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 2001 are estimated at $23,000. For the five-year period from 2001 to 2005, San Jose Water Company's net capital expenditures are estimated to aggregate $120,000. Net capital expenditures represent gross capital expenditures less advances and contributions in aid of construction. Results of Operations Overview SJW Corp.'s consolidated net income for the third quarter of 2001 was $6,395, an increase of 29% from $4,960 in the third quarter of 2000. The earnings increase was due primarily to higher revenue as a result of rate increases. Earnings for the nine months of 2001 increased 25% from $9,009 to $11,243 in comparison with the same period in 2000. The increase in consolidated net income was due primarily to higher revenue partially offset by higher water production costs. Operating Revenue The change in consolidated operating revenue from the same period in 2000 was due to the following factors: Three months ended Nine months ended Sept.30 2001 vs 2000 Sept.30 2001 vs 2000 Increase/(decrease) Increase/(decrease) - --------------------------------------------------------------------- Utility: Consumption $ 729 1.9% $ 1,229 1.3% New customers 168 0.4 613 0.6 Rate increases 4,014 10.3 7,101 7.4 Parking & rental 19 - (87) - Crystal Choice 71 0.2 153 0.1 - --------------------------------------------------------------------- $5,001 12.8% $9,009 9.4% ===================================================================== Average usage per metered customer for the third quarter and nine months year-to-date of 2001 were slightly higher than the same comparable periods of 2000. Operating Expense The change in consolidated operating expense, excluding income taxes, from the same period in 2000 was due to the following: Three months ended Nine months ended Sept.30 2001 vs 2000 Sept.30 2001 vs 2000 Operating Expense Increase/(decrease) Increase/(decrease) - -------------------------------------------------------------------- Production Costs: Reduced surface water supply $ 339 1.2% $ 1,925 2.6% Usage and new customers 839 2.9 1,391 1.9 Pump tax and purchased water price increase 1,066 3.6 2,369 3.3 Energy price increase 650 2.2 1,718 2.4 ----- ---- ----- ---- Total production costs 2,894 9.9 7,403 10.2 Operation and maintenance 45 0.1 (1,555) (2.1) Depreciation and amortization 357 1.2 1,043 1.4 General taxes 84 0.3 247 0.3 - --------------------------------------------------------------------- $3,380 11.5% $ 7,138 9.8% ===================================================================== The higher third quarter production expense in 2001 was attributable to increased water production cost as a result of rate increases in Santa Clara Valley Water District's (SCVWD)purchased water and pump tax costs, the energy providers' power cost increase in January and March of 2001, and the reduced availability of surface water. Surface water supply is the least expensive source of water and the availability of a higher surface water supply reduced water production costs. San Jose Water Company received a corresponding rate increase associated with the SCVWD's production cost increase effective in July 2001. The change in San Jose Water Company's source of supply mix was as follows: Three months ended Nine months ended 2001 vs. 2000 2001 vs. 2000 Increase/(decrease) Increase/(decrease) - ---------------------------------------------------------------- (Million gallons) Purchased water (77) -% 779 2% Ground water 494 3% 1,157 3% Surface water (292) (2%) (1,705) (4%) Reclaimed water 8 -% 31 -% - ---------------------------------------------------------------- 133 1% 262 1% ================================================================ The changes in the source of supply mix were consistent with the changes in the water production costs. Operation and maintenance expense for the third quarter of 2001 were comparable to the same period in 2000. However, increases in Operation and maintenance expenses for the nine months period ended September 30, 2001 in comparison to the same period in 2000 were more than offset by non-recurring merger-related costs incurred in conjunction with the proposed merger of SJW Corp. with American Water Works Company, Inc. The merger was terminated on March 1, 2001. Other The effective income tax rates for the current quarter and nine months year-to-date of 2001 was 35% which was slightly below the rates for the comparable periods in 2000 due to the tax benefits associated with certain merger-related expenses. 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 2001 may not be indicative of results for the full year. Water Supply On November 6, 2001, Santa Clara Valley Water District's 10 reservoirs were 44% full with 47,884 acre feet of water in storage which is slightly below 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 is slightly below the 30-year average. San Jose Water Company has implemented a comprehensive security upgrade program for all production and storage facilities. Pilot testing began on new wireless alarm systems at two facilities. These systems will be installed in all facilities and will be linked to Supervisory Control and Data Acquisition System (SCADA) for continuous monitoring. San Jose Water Company also shares security and planning information with SCVWD, various governmental and law enforcement agencies. Certain site-specific measures are also implemented at various strategic locations to protect the safety and security of water supply. Regulatory Affairs On April 19, 2001, San Jose Water Company received a decision from the California Public Utilities Commission regarding its request for a general rate increase filed in February 2000. The decision granted San Jose Water Company a revenue increase of $8,400 or 7.4% for 2001, $3,600 (2.9%) for 2002 and $3,900 (3.1%) for 2003. The authorized return on equity in the decision is 9.95% for the years 2001 through 2003. The authorized return on rate base is 9.10% for 2001, and 9.11% for 2002 and 2003. On June 28, 2001, San Jose Water Company received CPUC approval for an offset rate increase in the amount of $5,400 or 4.3%. This rate increase offsets the July 1, 2001 increase in purchased water and pump tax costs charged by the Santa Clara Valley Water District and the higher costs of electric power resulting from the Pacific Gas and Electric Company rate increases on January 4, 2001 and March 27, 2001. An offset rate increase is a cost reimbursement and is not designed to increase the earnings of the utility. Pursuant to Section 792.5 of the California Public Utilities Code, a balancing account is to be kept for all expense items for which revenue offsets have been authorized. A separate balancing account must be maintained for each offset expense item (e.g. purchased water, purchased power and pump tax). The purpose of a balancing account is to track the under-collection or over-collection associated with expense changes and the revenue authorized by the CPUC to offset those expense changes. At September 30, 2001, the balancing account, excluding capitalized interest refunds due to customers, had a net under-collected balance of $385. To the extent that San Jose Water Company has to pump water during peak periods to satisfy customer demand when imported water is not available, higher energy cost will be incurred. Currently, the CPUC has no established procedure for water utilities to recover additional costs incurred due to such unanticipated changes in supply mix. PART II. OTHER INFORMATION Item 5. OTHER INFORMATION On October 25, 2001, the Board of Directors declared the regular quarterly dividend of $.6525 per common share. The dividend will be paid December 1, 2001 to shareholders of record as of the close of business on November 5, 2001. 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 SK for the quarter ended September 30, 2001. (b) Reports on Form 8-K No reports on Form 8-K have been filed during the quarter ended September 30, 2001. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Corporation has no derivative financial instruments, financial instruments with significant off-balance sheet risks, or financial instruments with concentrations of credit risk. There is no material sensitivity to changes in market rates and prices. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SJW Corp. Date: November 9, 2001 By /s/Angela Yip ------------------ Angela Yip, Chief Financial Officer and Treasurer 14.