FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended June 30, 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 (IRS 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 August 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 SIX MONTHS ENDED JUNE 30 JUNE 30 2001 2000 2001 2000 - ---------------------------------------------------------------------- Operating revenue $36,364 33,064 $60,609 56,601 Operating expense: Operation: Purchased water 9,181 8,100 14,968 12,830 Power 2,057 1,074 2,775 1,707 Pump taxes 6,058 4,852 8,980 7,677 Other 4,995 6,859 11,304 12,796 Maintenance 1,821 1,752 3,388 3,495 Property and other nonincome taxes 1,055 982 2,161 1,998 Depreciation and Amortization 3,310 2,962 6,608 5,923 Income taxes 2,172 2,227 2,498 3,101 - --------------------------------------------------------------------- Total operating expenses 30,649 28,808 52,682 49,527 - --------------------------------------------------------------------- Operating income 5,715 4,256 7,927 7,074 Other income 165 22 363 111 Dividend income 307 302 613 605 Interest and other charges (2,017) (1,858) (4,055) (3,741) - ---------------------------------------------------------------------- Net income $ 4,170 2,722 $ 4,848 4,049 ====================================================================== Other comprehensive income (loss): Unrealized gain (loss) on investment (3,245) 1,581 (1,485) (6,668) Income taxes related to other comprehensive income (loss) 1,330 (648) 609 2,734 - ---------------------------------------------------------------------- Other comprehensive income (loss), net (1,915) 933 (876) (3,934) - ---------------------------------------------------------------------- Comprehensive income $ 2,255 3,655 $ 3,972 115 ====================================================================== Basic earnings per share $1.37 0.89 $ 1.59 1.33 ====================================================================== Comprehensive income per share $ 0.74 1.20 $ 1.30 0.04 ====================================================================== Dividends per share of common stock $ 0.65 0.62 $ 1.27 1.23 ====================================================================== 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) JUNE 30 DECEMBER 31 2001 2000 - ---------------------------------------------------------------------- ASSETS Utility plant $482,632 462,892 Less accumulated depreciation and amortization 145,790 139,396 - ---------------------------------------------------------------------- Net utility plant 336,842 323,496 Nonutility property 10,196 9,979 Current assets: Cash and equivalents 868 783 Accounts receivable and accrued revenue 20,460 13,125 Prepaid expenses and other 1,187 1,344 - ---------------------------------------------------------------------- Total current assets 22,515 15,252 Other assets: Investment in California Water Service Group 28,214 29,699 Investment in joint venture 1,223 1,237 Debt issuance and reacquisition costs 3,638 3,719 Regulatory assets 5,270 5,256 Goodwill 1,786 1,829 Other 1,851 1,463 - --------------------------------------------------------------------- Total other assets 41,982 43,203 - ---------------------------------------------------------------------- $411,535 391,930 ====================================================================== CAPITALIZATION AND LIABILITIES Capitalization: Common stock $ 9,516 9,516 Additional paid-in capital 12,356 12,357 Retained earnings 117,220 116,232 Accumulated other comprehensive income 5,344 6,220 - ---------------------------------------------------------------------- Shareholders' equity 144,437 144,325 Long-term debt 90,000 90,000 - ---------------------------------------------------------------------- Total capitalization 234,437 234,325 Current liabilities: Line of credit 18,700 11,200 Accrued interest 2,768 2,789 Accounts payable and purchased power 2,839 1,134 Accrued pump taxes and purchased water 8,160 4,629 Accrued taxes 1,710 266 Refund due to customers 1,072 1,072 Other current liabilities 3,183 5,652 - ---------------------------------------------------------------------- Total current liabilities 38,432 26,742 Deferred income taxes and tax credits 26,113 24,713 Advances for and contributions in aid of construction 106,912 100,222 Other noncurrent liabilities 5,641 5,928 - ---------------------------------------------------------------------- $411,535 391,930 ====================================================================== See accompanying notes to condensed consolidated financial statements. SJW CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) SIX MONTHS ENDED JUNE 30 2001 2000 - ---------------------------------------------------------------------- Operating activities: Net income $4,848 4,049 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,608 5,923 Deferred income taxes and credits (724) (3,298) Changes in operating assets and liabilities: Accounts receivable and accrued revenue (7,335) (4,708) Prepaid expenses and other 157 (200) Accounts payable and other current Liabilities (764) 1,750 Accrued pump taxes and purchased water 3,531 2,086 Accrued taxes payable 1,444 (365) Other changes, net 2,265 3,608 - ---------------------------------------------------------------------- Net cash provided by operating activities 10,030 8,845 - ---------------------------------------------------------------------- Investing activities: Additions to utility plant (20,686) (14,329) Additions to nonutility property (158) (47) Cost to retire utility plant (195) (333) Distribution from joint venture 101 - - ---------------------------------------------------------------------- Net cash used in investing activities (20,938) (14,709) - ---------------------------------------------------------------------- Financing activities: Dividends paid (3,860) (3,745) Borrowings on line of credit 7,500 4,100 Advances and contributions in aid of construction 8,036 6,452 Refunds of advances (683) (692) - ---------------------------------------------------------------------- Net cash provided by financing activities 10,993 6,115 - ---------------------------------------------------------------------- Net change in cash and equivalents $ 85 251 - ---------------------------------------------------------------------- Cash and equivalents, beginning of period $ 783 124 - ---------------------------------------------------------------------- Cash and equivalents, end of period $ 868 375 ====================================================================== Supplemental disclosures of cash flow information: Cash paid during period for: Interest $516 3,651 Income taxes - 4,018 See accompanying Notes to Condensed Consolidated Financial Statements. SJW CORP. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 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 are 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 is 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 operation. NOTE II - CRYSTAL CHOICE WATER SERVICE LLC -------------------------------- SJW Corp.'s condensed consolidated financial statements for the three and six months ended June 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. intends to invest $850 in the first year of operation for a 75% interest of CCWS. 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 - 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 Statement of Financial Accounting Standards (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. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands) ----------------------------------------------------------- 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 $40,000 at rates which approximate the bank's prime or reference rate. At June 30, 2001, SJW Corp. and its subsidiaries had available unused short- term bank lines of credit of $21,300. San Jose Water Company plans to issue $20,000 of long-term financing in the fourth quarter of 2001. Proceeds from the sale of the long- term financing will be used to repay short-term borrowings, and fund construction expenditures through the first half of 2002. San Jose Water Company's capital expenditures are incurred in connection with normal upgrading and expansion of existing facilities and to comply with environmental regulations. Capital expenditures for the next five years are likely to increase from historical levels due to the addition of new, or expansion of existing, water treatment, transmission and distribution, and source of supply facilities and to comply with environmental regulations. Net capital expenditures for 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. SJW Corp intends to invest $850 in the first year of operation for a 75% interest of Crystal Choice Water Service LLC. The second half of the funding to CCWS will be made in August 2001. Results of Operations: - --------------------- Overview SJW Corp.'s consolidated net income for the second quarter of 2001 was $4,170, an increase of 53% from $2,722 in the second quarter of 2000. Earnings for the second quarter of 2001 were greater than the second quarter of 2000 primarily due to the inclusion in the second quarter of 2000 results of non-recurring merger-related costs incurred in conjunction with the proposed merger of SJW Corp. with American Water Works Company Inc., which was terminated on March 1, 2001. Operating Revenue - ----------------- The change in consolidated operating revenue from the same period in 2000 was due to the following factors: Three months ended Six months ended June 30 2001 vs. 2000 June 30 2001 vs. 2000 Operating Revenue Increase/(decrease) Increase/(decrease) - ---------------------------------------------------------------------- Utility: Consumption $ 555 2% $ 500 1% New Rates 2,649 8% 3,087 5% New Customers 218 1% 445 1% Parking & Rental (173) (1)% (106) -% Crystal Choice 51 -% 82 -% - ---------------------------------------------------------------------- $3,300 10% $4,008 7% ====================================================================== Operating Expenses - ------------------ The change in consolidated operating expense, excluding income taxes, from the same period in 2000 was due to the following: Three months ended Six months ended June 30 2001 vs. 2000 June 30 2001 vs. 2000 Operating Expense Increase/(decrease) Increase/(decrease) - -------------------------------------------------------------------- Production costs: Reduced surface water supply $1,153 4% $1,586 3% Usage and new customers 327 1% 552 1% Pump tax and purchased water price increase 835 3% 1,303 3% Energy price increase 955 4% 1,068 2% ----- -- ----- -- Total Production costs 3,270 12% 4,509 9% Operation and maintenance (1,795) (6)% (1,599) (3)% Depreciation and amortization 348 1% 685 2% General taxes 73 - 163 - - ------------------------------------------------------------------- $1,896 7% $3,758 8% ================================================================== The increase in production costs was due primarily to reduced surface water supply, the Santa Clara Valley Water District (SCVWD) production cost (pump tax and purchased water) increases in July 2000 and the energy provider's power cost increase in January and March of 2001. Surface water supply is the least expensive source of water and the availability of a higher surface water supply reduced water production costs in the second quarter and six months ended June 30, 2000. San Jose Water Company received a corresponding rate increase associated with the SCVWD's production cost increase effective in July 2000. The change in San Jose Water Company's source of supply mix was as follows: Three months ended Six months ended 2001 vs. 2000 2001 vs. 2000 Increase/(decrease) Increase/(decrease) - ----------------------------------------------------------------- (Million gallons) Purchased water 254 2% 856 4% Ground water 820 6% 663 3% Surface water (1,006) (7) (1,413) (6)% Reclaimed water 20 - 23 - - ----------------------------------------------------------------- 88 1% 129 1% ================================================================= The changes in the source of supply mix were consistent with the changes in the water production costs. Increases in operation and maintenance expenses for the second quarter of 2001 were more than offset by the reduction in the merger-related costs incurred in the quarter ending June 30, 2000. Depreciation expense increased due to growth in utility plant authorized by the CPUC. Income tax expense decreased $55 or 3% in comparison to the second quarter of 2000. Year-to-date income tax expense decreased $603 over the same six-month period of 2000. The effective income tax rate for the second quarter of 2001 was 34% 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. Average usage per metered customer for the second quarter of 2001 increased 1% over the same period in 2000 and year-to-date average usage per metered customer increased 1% from the same six-month period in 2000. Water Supply & Energy Resources - ------------------------------- On August 2, 2001, Santa Clara Valley Water District's ten storage reservoirs were 58% full with 97,468 acre feet of water, which is average for the past 20 years. The rainfall in the winter of 2001 maintained an average surface water supply for San Jose Water Company. Surface water is a less costly source of water and its availability significantly impacts the results of operation. California is currently going through an energy crisis due to supply shortage. San Jose Water Company has evaluated its strategy and contingency plans for potential energy blackouts in California during the peak energy consumption period of the summer. The pumps and motors at San Jose Water Company's groundwater production facilities are propelled by electrical power. Over the last few years San Jose Water Company has installed standby power generators at eighteen of its strategic water production sites. Selected stations without standby generators are equipped to operate with portable generating equipment in the case of an emergency. In addition, the commercial office and operations control centers are equipped with standby generators that allow critical distribution and customer service operations to continue during a power outage. The SCVWD informed San Jose Water Company that its filter plants, which deliver imported water to the San Jose Water Company's facilities, are also equipped with standby generators. However, San Jose Water Company was also informed that the State of California and the federal government, who provide imported water to the SCVWD do not have standby generators at their raw water stations. San Jose Water Company is working diligently with its energy supplier to clarify the status of the blackouts and assess their impact on its ability to provide adequate supplies to its customers during peak periods. In the event of a power outage, San Jose Water Company believes it will be able to prevent an interruption of service to customers for a limited period through pumping water with its standby generators and through the imported water from SCVWD. However, if imported water is unable to be delivered to the region to satisfy local demand, San Jose Water Company will have to pump water at peak and partial-peak periods which will increase San Jose Water Company's energy costs. San Jose Water Company expects to be able to meet customer demand under the normal rolling blackout scenario (2-4 hours of rolling blackout within a 24-hour period). Extended blackouts on consecutive days would increase the vulnerability of the system depending on the duration and frequency of the outages. 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 $8.4 million or 7.4% for 2001, $3.6 million (2.9%) for 2002 and $3.9 million (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 $5.4 million, 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 June 30, 2001, the balancing account, excluding capitalized interest refunds due to customers, had a net over- collected balance to be refunded of $254. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- At the 2001 Annual Meeting of Shareholders of the Corporation held on July 19, 2001, nine directors were re-elected to the Board of Directors, and the appointment of KPMG LLP as independent auditors for 2001 was ratified by the following votes: Name of Director In Favor Against Mark L. Cali 2,778,584 18,990 J. Philip DiNapoli 2,746,184 51,390 Drew Gibson 2,775,848 21,726 Ronald R. James 2,772,101 25,473 George Moss 2,774,901 22,673 Roscoe Moss, Jr. 2,772,869 24,705 W. Richard Roth 2,721,189 76,375 Charles J. Toeniskoetter 2,774,848 22,726 J.W. Weinhardt 2,691,609 105,965 Ratification of appointment of independent auditors for 2001: In Favor Against Abstaining 2,766,806 13,689 17,079 The amendment of the bylaw to add a director to the Board as set forth in the Corporation's Proxy Statement for the 2001 Annual Meeting of Shareholders held on July 19, 2001 was approved by the following votes: In Favor Against Abstaining Non-votes 2,262,569 60,758 19,343 494,904 Item 5. OTHER INFORMATION ----------------- On July 19, 2001, the Board of Directors declared the regular quarterly dividend of $.6525 per common share. The dividend will be paid September 1, 2001 to shareholders of record as of the close of business on August 1, 2001. At the same meeting, the Board of directors appointed Frederick R. Ulrich to fill the newly created tenth director position at SJW Corp. Item 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a.) Exhibits required to be filed by Item 601 of Regulation S-K There were no exhibits required to be filed by Item 601 of Regulation S-K for the quarter ended June 30, 2001. (b.) Reports on Form 8-K No reports on Form 8-K have been filed during the quarter ended June 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: August 7, 2001 By /s/ Angela Yip ------------------- Angela Yip Chief Financial Officer and Treasurer 15 15