1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ______________to_____________ 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, California 95196 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 408-279-7810 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of each exchange on Title of each class which registered Common Stock, Par Value $3.125 American Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None (Title of Class) 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [] The aggregate market value of the voting stock held by non-affiliates of the registrant - $135,471,414 on March 12, 1998. Shares of common stock outstanding on March 1, 1998 - 3,170,347 DOCUMENTS INCORPORATED BY REFERENCE Definitive Proxy Statement relating to the Registrant's 1998 Annual Meeting (filed on February 27, 1998), incorporated into Part III hereof. EXHIBIT INDEX The Exhibit Index to this Form 10-K is located in Part IV, Item 14 of this document. TABLE OF CONTENTS PART I Page Item 1. Business a. General Development of Business 3 Regulation and Rates b. Financial Information about Industry Segments 5 c. Narrative Description of Business 6 General 6 Water Supply 6 Franchises 6 Seasonal Factors 7 Competition and Condemnation 7 Environmental Matters 7 Employees 7 Executive Officers of the Registrant 8 d. Financial Information about Foreign and Domestic Operations and Export Sales 9 Item 2. Properties 9 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 11 a. Market Information 11 b. Holders 11 c. Dividends 11 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 8. Financial Statements and Supplementary Data 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 36 Disclosure PART III Item 10. Directors and Executive Officers of the Registrant 35 Item 11. Executive Compensation 35 Item 12. Security Ownership of Certain Beneficial Owners and Management 35 Item 13. Certain Relationship on Related Transactions 35 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 35 Exhibit Index 36 Signatures 39 PART I Item 1. Business. (a) General Development of Business. SJW Corp., incorporated in California on February 8, 1985. SJW Corp. is a holding company with two wholly owned subsidiaries, San Jose Water Company and SJW Land Company. San Jose Water Company, with headquarters at 374 West Santa Clara Street, San Jose, California 95196, was incorporated under the laws of the State of California in 1931, succeeding a business founded in 1866. San Jose Water Company is a public utility in the business of providing water service to a population of approximately 965,000 in an area comprising about 138 square miles in the metropolitan San Jose area. San Jose Water Company's web site can be accessed via the Internet at http://www.sjwater.com SJW Land Company was incorporated in October, 1985. SJW Corp. also owns 1,099,952 shares of California Water Service Group, (formerly California Water Service Company). Regulation and Rates. San Jose Water Company's rates, service and other matters affecting its business are subject to regulation by the Public Utilities Commission of the State of California (the "Commission"). Ordinarily, there are two types of rate increases, general and offset. The purpose of the latter is generally to compensate utilities for increases in specific expenses, such as those for purchased water or power. The most recent general rate case decision authorized an initial increase followed by two annual step increases designed to maintain the authorized return on equity over a three-year period. General rate applications are normally filed and processed during the last year covered by the most recent rate case in an attempt to avoid regulatory lag. Pursuant to Section 792.5 of the 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. 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 Commission to offset those expense changes. At December 31, 1997 the balancing account had a net under-collected balance to be offset of $311,000. 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. Important factors that could cause or contribute to such differences include the following: The Public Utilities Commission of California's policy and regulations can adversely affect San Jose Water Company's operating results through the availability, timeliness and amount of rate relief. The Commission's willingness to allow San Jose Water Company to recover all of its capital expenditure and to provide financial and operational flexibility to engage in non-regulated operations can also affect San Jose Water Company's operating results. San Jose Water Company's sales and therefore its operating results could be adversely affected by several events: Difficulties in obtaining a secured water supply from the Santa Clara Valley Water District which receives its allotment from the state and federal water projects could prevent the company from satisfying its customer demand within its service area; Fluctuation of customer sales due to lifestyle or weather; Availability of recycled water and its acceptance by customers as a substitute to potable water; and Economic development and growth in San Jose Water Company's service area. SJW Corp.'s expenses and therefore its operating results could be adversely affected by the following: Fluctuation of surface water availability from San Jose Water Company's Santa Cruz mountain watershed, which produces a less costly water supply, could result in the need to procure more costly water from other sources; Stringent environmental and water quality regulations could increase San Jose Water Company's water quality compliance costs; Consequences from pollution and contamination of San Jose Water Company's well and source of supply could result in the need to procure more costly water from other sources; The level of labor and non-labor operating and maintenance expenses as affected by inflationary forces and collective bargaining power could adversely affect the operating and maintenance expenses of the corporation; Cost and other effects of lawsuits against SJW Corp. or its subsidiaries, whether civil, environmental, product-related or liability- related could increase the corporation's legal, liability and insurance costs. SJW Land Company's expense and operating results could be adversely affected by the parking lot activities, the San Jose Arena events and the development and sale of the undeveloped parcels of land. See also the heading "Factors That May Adversely Affect Future Operation Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". The Company undertakes no obligation to update the information including the forward-looking statements, contained in this report. (b) Financial Information about Industry Segments. San Jose Water Company generated 99%, 99%, and 98% of SJW Corp.'s consolidated revenue, and 90%, 66%, and 91% of SJW Corp.'s consolidated income for the years ended December 31, 1997, 1996 and 1995, respectively. There were no significant changes in 1997 in the type of products produced or services rendered by San Jose Water Company, or in its markets or methods of distribution. SJW Land Company contributed 3% to SJW Corp.'s consolidated income in 1997. In 1996, SJW Land Company sold non-utility property and contributed 28% to SJW Corp.'s consolidated income for the year. Western Precision, Inc. a mechanical parts manufacturing operation, which was sold on February 28, 1995, generated 1% of SJW Corp.'s consolidated revenue for the year 1995. Dividend income from California Water Service Group generated 7%, 5% and 8% of consolidated income for the years 1997, 1996 and 1995, respectively. (c) Narrative Description of Business. (1) (i) General. 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. In October 1997, San Jose Water Company commenced operation of the City of Cupertino Municipal water system under terms of a 25-year lease. The system is adjacent to the existing San Jose Water Company Service area and has 4,200 service connections. Under terms of the lease, San Jose Water Company made an up-front $6.8 million lease payment to the City which will be amortized over the lease term. The Company is responsible for all aspects of system operation including capital improvements. (1) (iii) Water Supply. San Jose Water Company's water supply is obtained from wells, surface run- off or diversion and by purchases from the Santa Clara Valley Water District ("SCVWD"). Surface supplies, which during a year of normal rainfall satisfy about 6% to 8% of San Jose Water Company's current annual needs, provide approximately 1% of its water supply in a dry year and approximately 14% in a wet year. In dry years the decrease in water from surface run-off and diversion, and the corresponding increase in purchased and pumped water increases production costs substantially. San Jose Water Company implemented various mandatory water rationing programs throughout the period of 1989-1993. Groundwater levels in 1997 remained at a high level reflecting the impact of the last rainfall season. SCVWD's reservoir storage of approximately 177,000 acre feet (100% of capacity) was reported on February 10, 1998. Until 1989, San Jose Water Company had never found it necessary to impose mandatory water rationing. Except in a few isolated cases when service had been interrupted or curtailed because of power or equipment failures, construction shutdowns or other operating difficulties, San Jose Water Company had not at any prior time in its history interrupted or imposed mandatory curtailment of service to any type or class of customer. During the summer of 1989 through March 1993, rationing was imposed intermittently, to all customers based on request from Santa Clara Valley Water District. (1) (iv) Franchises. San Jose Water Company holds such franchises or permits in the communities it serves as it judges necessary to operate and maintain its facilities in the public streets. (1) (v) Seasonal Factors. 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 climatic conditions can cause seasonal water consumption by residential customers to vary significantly. (1) (x) Competition and Condemnation. San Jose Water Company is a public utility regulated by the Commission and operates within a service area approved by the Commission. The laws of the State of California provide that no other investor owned public utility may operate in San Jose Water Company's service area without first obtaining from the Commission a certificate of public convenience and necessity. Past experience shows such a certificate will be issued only after demonstrating San Jose Water Company's service in such area is inadequate. California law also provides that whenever a public agency constructs facilities to extend utility service to the service area of a privately owned public utility (like San Jose Water Company), such an act constitutes the taking of property and is conditioned upon payment of just compensation to the private utility. Under the constitution and statutes of the State of California, municipalities, water districts and other public agencies have been authorized to engage in the ownership and operation of water systems. Such agencies are empowered to condemn properties operated by privately owned public utilities upon payment of just compensation and are further authorized to issue bonds (including revenue bonds) for the purpose of acquiring or constructing water systems. To the Company's knowledge, no municipality, water district or other public agency has pending any action to condemn any part of San Jose Water Company's system. (1) (xii) Environmental Matters. San Jose Water Company maintains procedures to produce potable water in accordance with all applicable county, state and federal environmental rules and regulations. Additionally, San Jose Water Company is subject to environmental regulation by various other governmental authorities. (See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations.") (1) (xiii) Employees. As of December 31, 1997, San Jose Water Company had 280 employees, of whom 57 were executive, administrative or supervisory personnel, and of whom 223 were members of unions. San Jose Water Company reached a two-year collective bargaining agreement with the Utility Workers of America, representing the majority of employees and the International Union of Operating Engineers, representing certain employees in the engineering department covering the years 1997 and 1998. Both groups are affiliated with the AFL-CIO. Executive Officers of the Registrant. Name Age Offices and Experience J.W. Weinhardt 67 SJW Corp. - Chairman, Chief Executive Officer. Prior to becoming Chairman in October 1996 he was President; Director and Member of the Executive Committee of the Board of Directors since 1985. San Jose Water Company - Chairman of the Board. Prior to his election to Chairman of the Board in October 1994, he was President. He also served as Chief Executive Officer until October 1996; Director and Member of the Executive Committee of the Board of Directors since 1974. Mr. Weinhardt has been with San Jose Water Company since 1963. W.R. Roth 45 SJW Corp. - President of the Corporation since October 1996. Prior to that he was Vice President from April 1992 until October 1996 and Chief Financial Officer and Treasurer from January 1990 until October 1996. San Jose Water Company - President since October 1994. He has been Chief Executive Officer since October 1996. Prior to that he was Chief Operating Officer from October 1994 until October 1996. He was Vice President from April 1992 until July 1994 and Senior Vice President from July 1994 until October 1994. He served as Chief Financial Officer and Treasurer from January 1990 through October 1994. R.J. Balocco 47 San Jose Water Company - Vice President - Corporate Communications since October 1995. He was Vice President, Administration from April 1992 until October 1995 and Manager of Customer Service until October 1995. Mr. Balocco has been with San Jose Water Company since 1982. G.J. Belhumeur 52 San Jose Water Company - Vice President - Operations since April 1996. Prior to April 1996 he was Operations & Maintenance Manager. Mr. Belhumeur has been with San Jose Water Company since 1970. F.R. Meyer 58 San Jose Water Company - Vice President - Regulatory Affairs since January 1990. Mr. Meyer has been with San Jose Water Company since 1978. R.J. Pardini 52 San Jose Water Company - Vice President - Chief Engineer since April 1996. Prior to April 1996 he was Chief Engineer. Mr. Pardini has been with San Jose Water Company since 1987. R.S. Yoo 47 San Jose Water Company - Vice President - Water Quality since April 1996. Prior to April 1996 he was Water Quality Manager. He has been with San Jose Water Company since 1985. A. Yip 44 SJW Corp., Chief Financial Officer and Treasurer since October 1996. San Jose Water Company - Chief Financial Officer and Treasurer since October 1994. She was Regulatory Affairs Manager from July 1993 until October 1994 and prior to that Regulatory Affairs Supervisor. Ms. Yip has been with the San Jose Water Company since 1986. R.A. Loehr 51 SJW Corp. and San Jose Water Company, Secretary since March 1, 1998. Mr. Loehr also serves as an attorney and has been with San Jose Water Company since 1987. A.J. Elliott 34 San Jose Water Company, Controller since January 1995. Prior to that she served as Accounting Manager. Ms. Elliott has been with San Jose Water Company since 1990. No executive officer has any family relationship to any other executive officer or director. No executive officer is appointed for any set term. There are no agreements or understandings between any executive officer and any other person pursuant to which he was selected as an officer, other than those with directors or officers of SJW Corp. acting solely in their capacities as such. (d) Financial Information about Foreign and Domestic Operations and Export Sales. Substantially all of SJW Corp.'s revenue and expense are derived from operations located in the County of Santa Clara in the State of California. Item 2. Properties. The properties of San Jose Water Company consist of a unified system of water production, storage, purification and distribution located in the County of Santa Clara in the State of California. In general, the property is comprised of franchise rights, water rights, necessary rights-of-way, approximately 7,000 acres of land held in fee (which is primarily nondevelopable watershed), impounding reservoirs with a capacity of approximately 2.256 billion gallons, diversion facilities, wells, distribution storage of approximately 240 million gallons and all water facilities, equipment and other property necessary to supply its customers. San Jose Water Company maintains all of its properties in good operating condition in accordance with customary proper practice for a water utility. San Jose Water Company's well pumping stations have a production capacity of approximately 260 million gallons per day and the present capacity for taking purchased water is approximately 166 million gallons per day. The gravity water collection system has a physical delivery capacity of approximately 25 million gallons per day. During 1997, a maximum and average of 200 million gallons and 128 million gallons of water per day, respectively, were delivered to the system. San Jose Water Company holds all its principal properties in fee, subject to current tax and assessment liens, rights-of-way, easements, and certain minor clouds or defects in title which do not materially affect their use. SJW Land Company owns approximately nine acres of property adjacent to San Jose Water Company's general office facilities and approximately another 18 undeveloped acres in the San Jose Metropolitan area. Eight of the nine acres of land adjacent to San Jose Water Company are used as surface parking facilities and generate substantially all SJW Land Company's revenue. Item 3. Legal Proceedings. In 1993, Valley Title Company and its insurer claimed in a lawsuit that a fire service pipeline ruptured, causing water and heating oil to flood the title company's basement. In April 1995, San Jose Water Company's insurance carrier settled the property damage claim of plaintiff insurance company for $3.5 million. The jury separately awarded plaintiff title company $3 million for its loss of business documents. A unanimous appellate court reversed this decision, and in January 1998, the California Supreme Court denied review of that reversal. San Jose Water Company believes it is now probable that this incident is concluded. However, it is uncertain whether or not San Jose Water Company will be asked to contribute any sums to the property damage settlement. Management has consistently maintained that the pollution exclusion asserted by its insurance carrier does not apply to this type of incident. The company will continue to aggressively resist any future demand for contribution made by its insurer. 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. Although the company could have filed an advice letter with the California Public Utilities Commission requesting authorization to collect the new franchise fee from its customers, San Jose Water Company, with the concurrence of the Division of Ratepayer Advocates, decided to ask the Commission for permission to establish a memorandum account for the imposed franchise fee. A Commission decision issued on November 8, 1995, authorized San Jose Water Company to establish such an account. San Jose Water Company will 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 lawsuit filed to challenge the ordinance. The City has appealed the decision. San Jose Water Company does not believe, based upon all available information, that the outcome of this event will have a material effect on its financial position. Item 4. Submission of Matters to a Vote of Security Holders. None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. (a) Market Information. (1) (i) Exchange SJW Corp.'s common stock is traded on the American Stock Exchange under the symbol SJW. (1) (ii) High and Low Sales Prices The information required by this item as to the high and low sales prices for SJW Corp.'s common stock for each quarter in the 1997 and 1996 fiscal years is contained in the section captioned "Market price range of stock" in the tables set forth in Note 10 of "Notes to Consolidated Financial Statements" in Part II, Item 8. (b) Holders. There were 1,160 record holders of SJW Corp.'s common stock on December 31, 1997. (c) Dividends. Quarterly dividends have been paid on SJW Corp.'s and its predecessor's common stock for 217 consecutive quarters and the quarterly rate has been increased during each of the last 30 years. The information required by this item as to the cash dividends paid on common stock in 1997 and 1996 is contained in the section captioned "Dividends per share" in the tables set forth in Note 10 of "Notes to consolidated Financial Statements" in Part II, Item 8. Item 6. Selected Financial Data. FIVE YEAR STATISTICAL REVIEW 1997 1996 1995 1994 1993 CONSOLIDATED RESULTS OF OPERATIONS (In thousands) Operating revenue $110,084 102,593 97,385 99,422 95,045 Operating expense: Operation 61,382 57,231 57,339 62,648 57,016 Maintenance 7,087 6,851 6,342 6,289 5,417 Taxes 13,454 12,234 10,764 9,426 10,829 Depreciation 8,847 8,671 7,626 7,292 6,823 -------------------------------------------- Total operating expense 90,770 84,987 82,071 85,655 80,085 ------------------------------------------- Operating income 19,314 17,606 15,314 13,767 14,960 Interest expense, other income and deductions 4,098 (954) 3,779 3,865 3,193 -------------------------------------------- Net income 15,216 18,560 11,535 9,902 11,767 Dividends paid 7,228 7,163 7,022 6,826 6,637 -------------------------------------------- Invested in the business $ 7,988 11,397 4,513 3,076 5,130 ============================================= CONSOLIDATED PER SHARE DATA Net income $ 4.80 5.75 3.55 3.05 3.64 Dividends paid $ 2.28 2.22 2.16 2.10 2.04 Shareholders' equity at year-end $ 42.13 37.86 33.49 32.02 31.86 CONSOLIDATED BALANCE SHEET (In thousands) Utility plant $371,200 342,368 324,098 308,515 293,683 Less accumulated depreciation and amortization 114,851 107,584 100,000 95,083 90,030 ---------------------------------------------- Net utility plant 256,349 234,784 224,098 213,432 203,653 ---------------------------------------------- Nonutility property 7,301 7,287 6,624 7,178 6,775 ---------------------------------------------- Total assets 323,223 296,536 280,497 262,530 256,851 Capitalization: Common shareholders' equity 133,553 120,028 108,854 104,098 103,130 Long-term debt(includes current maturities) 75,000 76,500 77,500 64,000 66,000 ---------------------------------------------- Total capitalization $208,553 196,528 186,354 168,098 169,130 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Description of the Business SJW Corp. is a holding company with two wholly owned subsidiaries: San Jose Water Company and SJW Land Company. San Jose Water Company is a public utility in the business of providing water service to a population of approximately 965,000 in an area comprising about 138 square miles in the metropolitan San Jose area. SJW Land Company owns and operates a 900- space surface parking facility located adjacent to the San Jose Arena and also owns several undeveloped real estate parcels in San Jose. SJW Corp. owns 1,099,952 shares of California Water Service Group (formerly California Water Service Company). Results of Operations Consolidated results of operations for the year ended December 31, 1995 include the results of Western Precision, Inc. which was disposed of on February 28, 1995. CONSOLIDATED OPERATING REVENUE (in thousands) 1997 1996 1995 San Jose Water Company $108,991 101,780 95,634 Western Precision, Inc. - - 1,051 SJW Land Company 1,093 813 700 ----------------------------- $110,084 102,593 97,385 ============================= Consolidated operating revenue for 1997 increased $7,491,000 or 7% over 1996 due to a 5% increase in water consumption, a rate increase from the California Public Utilities Commission (Commission), increased activity in the parking facilities, and the operation of City of Cupertino municipal water system effective October 1, 1997. Consolidated operating revenue for 1996 increased $5,208,000 or 5% over 1995 due to increased water consumption and the approval of a rate increase from the Commission. CONSOLIDATED OPERATING EXPENSE (in thousands) 1997 1996 1995 San Jose Water Company $89,671 83,835 80,069 Western Precision, Inc. - - 1,179 SJW Land Company 812 694 463 SJW Corp. 287 458 360 ---------------------------- $90,770 84,987 82,071 ============================ In 1997 and 1996, consolidated operating expense increased 7% and 4%, respectively, from the previous years primarily due to increased water production. SOURCES OF SUPPLY (million gallons) 1997 1996 1995 Purchased water 26,611 23,328 20,380 Ground water 20,846 19,152 20,365 Surface water 4,881 5,908 5,275 ------------------------------ 52,338 48,388 46,020 ============================== Water production in 1997, including the Cupertino water operation, increased 3,950 million gallons, or 8%, over 1996. Water production in 1996 increased 2,368 million gallons, or 5% over 1995. These increases are consistent with the related operating expenses. The effective consolidated income tax rates for 1997, 1996 and 1995 were 40%, 38%, and 40%, respectively. Refer to Notes To Consolidated Financial Statements for the reconciliation of income tax expense to the amount computed by applying the federal statutory rate to income before income taxes. OTHER INCOME AND EXPENSE 1997 Dividend income increased $16,000, or 1%, over 1996 due to a $.03 per share increase in the California Water Service Group annual dividend. San Jose Water Company's interest cost on long-term debt in 1997, including capitalized interest, decreased $108,000 from 1996 due to the retirement of its Series P first mortgage bonds at maturity. Interest cost on long-term debt in 1996, including capitalized interest, increased $960,000 or 19%, from 1995 due to the issuance of the Series D unsecured notes. San Jose Water Company's weighted average cost of long-term debt, including amortization of debt issuance costs, was 8.27%, 8.22% and 8.21% as of December 31, 1997, 1996 and 1995, respectively. Liquidity and Capital Resources CAPITAL REQUIREMENTS San Jose Water Company's budgeted capital expenditures for 1998 compared to 1997, exclusive of capital expenditures financed by customer contributions and advances, are as follows: BUDGETED CAPITAL EXPENDITURES (in thousands) 1998 1997 Source of supply $ 86 -% $ 827 5% Reservoirs and tanks 365 2% 870 5% Pump stations and equipment 2,191 11% 1,649 9% Distribution system 15,061 71% 11,692 65% Equipment and other 3,350 16% 2,964 16% -------------------------------- $21,053 100% $18,002 100% ================================ The 1998 capital budget is concentrated in main replacements and related services. Over $15 million will be spent to systematically renew the company's aging infrastructure. San Jose Water Company expects to incur approximately $100,000,000, exclusive of customer contributions and advances, in capital expenditures over the next five years. San Jose Water Company's actual capital expenditures may vary from its projection due to changes in the expected demand for services, weather patterns, actions by governmental agencies and general economic conditions. Total additions to utility plant normally exceed company-financed additions by several million dollars because certain new facilities are constructed using advances from developers and contributions in aid of construction. Most of San Jose Water Company's distribution system has been constructed over the last forty years. 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. Additionally, in most cases replacement cost will significantly exceed the original installation cost of the retired asset due to increases in the cost of goods and services. SOURCES OF CAPITAL San Jose Water Company's ability to finance future construction programs and sustain dividend payments depends on its ability to attract external financing and maintain or increase internally generated funds. 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. Over the past five years SJW Corp. has paid its shareholders, in the form of dividends, an average of 55% of its net income. The remaining earnings have been reinvested. Capital requirements not funded by earnings are expected to be funded through external financing in the form of unsecured senior notes or a commercial bank line of credit. As of December 31, 1997, San Jose Water Company had $20,000,000 of unused line of credit and over $50,000,000 of borrowing capacity under the terms of the senior note agreements. 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. In 1997, San Jose Water Company redeemed its $1,500,000 Series P 6.5% first mortgage bonds at maturity. In 1996, San Jose Water Company redeemed its $1,000,000 Series O 6.5% first mortgage bonds at maturity. San Jose Water Company intends to satisfy all foreseeable future long-term financing needs with senior notes. Factors That May Affect Future Results The results of operations of San Jose Water Company generally depend on the following factors: (1) regulation, (2) surface water supply, and (3) operation and maintenance expense. REGULATION Principally all the operating revenue of San Jose Water Company results from the sale of water at rates authorized by the Commission. The Commission sets rates that are intended to provide revenue sufficient to recover operating expenses and produce a reasonable return on common equity. As a result of the Commission's General Rate Case decision, San Jose Water Company was authorized new rates, which became effective on July 22, 1996. In the decision the Commission authorized an average annual rate increase of 1.25% through 1999, for a total rate increase of $4.8 million during this period. The new rates reflect an authorized return on equity of 10.2%, which is within the range of recent rates of return authorized by the Commission for water utilities. The General Rate Case decision granted San Jose Water Company memorandum account protection for the largely indeterminate costs associated with the new or more stringent federal water quality regulations. With the establishment of the water quality memorandum account, any potential financial exposure resulting from these regulations has been substantially reduced. In November 1997, San Jose Water Company filed an advice letter requesting an attrition rate increase in the amount of $1,141,000 which became effective January 1, 1998. SURFACE WATER SUPPLY The level of surface water available in each year depends on the amount of rainfall and run-off collected in San Jose Water Company's Santa Cruz Mountains reservoirs. In a normal year, surface supply provides 6-8% of the total water supply of the system. Surface water is a less costly source of water and its availability may significantly impact the results of operations. OPERATION AND MAINTENANCE EXPENSE San Jose Water Company reached an agreement with its unionized personnel covering 1997 and 1998. The agreement includes a 3.5% wage increase each year and minor benefit modifications. SJW Corp. is working to ensure that all of its data processing programs are not affected by the Year 2000 challenge. A task force has been established to assess the impact of the Year 2000 on all business operations. Management expects efforts in addressing the Year 2000 challenges will not have a material impact on the corporation's financial condition and results of operation. ENVIRONMENTAL MATTERS San Jose Water Company's operations are subject to water quality and pollution control regulations issued by the United States Environmental Protection Agency (EPA), the California Department of Health Services and the California Regional Water Quality Control Board. The company is also subject to environmental laws and regulations administered by other state and local regulatory agencies. Under the federal Safe Drinking Water Act (SDWA), San Jose Water Company is subject to regulation by the EPA of the quality of water it sells and treatment techniques it uses to make the water potable. The EPA promulgates nationally applicable maximum contaminant levels (MCLs) for drinking water. San Jose Water Company is currently in compliance with all of the 84 MCLs promulgated to date. However, the EPA has continuing authority to issue additional regulations under the SDWA. San Jose Water Company has implemented monitoring activities and installed specific water treatment improvements enabling it to comply with all existing MCLs and plan for compliance with future drinking water regulations. In 1995, State Assembly Bill No. 733 was signed into law requiring public water systems in California serving at least 10,000 connections to fluoridate water. The law provides that water systems would not be required to comply unless funding for the needed capital and associated costs are available from any source other than ratepayers, shareholders, local taxpayers or bondholders of the public water system. In addition to SDWA, other environmental regulations are becoming increasingly important. The 1993 Santa Clara County Toxic Gas Ordinance required the elimination of chlorine gas disinfection systems or the installation of complete containment systems to control accidental chlorine gas discharges. During 1994, San Jose Water Company replaced the chlorine gas disinfection systems at its two water treatment plants with hypochlorinators which accomplish disinfection with liquid sodium hypochlorite. These facilities are currently operational and in compliance with all state and local hazardous materials storage regulations. Other state and local environmental regulations apply to San Jose Water Company's operations and facilities. These regulations relate primarily to the handling, storage and disposal of hazardous materials. San Jose Water Company is currently in compliance with state and local regulations governing underground storage tanks, disposal of hazardous wastes, non- point source discharges, and the warning provisions of the California Safe Drinking Water and Toxic Enforcement Act of 1986. Future drinking water regulations will most likely require increased monitoring, disinfection or other treatment of underground water supplies, more stringent performance standards for treatment plants and procedures to reduce levels of disinfection by-products. San Jose Water Company continues to seek to establish mechanisms for recovery of government- mandated environmental compliance costs. However, currently, there are limited regulatory mechanisms and procedures available to the company for the recovery of such costs and there can be no assurance that such costs will be fully recovered. NONREGULATED OPERATIONS The investment in California Water Service Group is expected to produce 1998 pre-tax dividend income and cash flow of approximately $1,200,000. SJW Land Company's parking revenue is largely dependent upon the level of events and activities at the San Jose Arena which is located adjacent to its parking facility. Under the terms of the City of Cupertino (City) municipal water system 25- year lease agreement, San Jose Water Company will be responsible for all maintenance, operating and capital costs of operating the system, while receiving all payments for water service. Water service rates will be subject to approval by the City Council. San Jose Water Company has the approval of the City to phase in the City's water service rates to San Jose Water Company's rates over a period of three years effective January 1998. The operating result of the lease will largely depend on the level of operation, maintenance and capital costs incurred. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENT In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. SJW Corp. plans to adopt SFAS No. 131 on January 1, 1998 and does not anticipate that implementing SFAS No. 131 will have a material effect on the corporation's financial condition and results of operations. Item 8. Financial Statements and Supplementary Data. Financial Statements: Independent Auditors' Report ---------------------------- The Shareholders and Board of Directors SJW Corp. We have audited the consolidated financial statements of SJW Corp. and subsidiaries as listed in Item 14(a). In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Item 14(a). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SJW Corp. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three- year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP San Jose, California January 23, 1998 CONSOLIDATED BALANCE SHEET SJW CORP. AND SUBSIDIARIES December 31 (in thousands, except share data) ASSETS 1997 1996 Utility plant $ 363,359 341,452 Intangible assets 7,841 916 ------------------- 371,200 342,368 Less accumulated depreciation and amortization 114,851 107,584 ------------------- 256,349 234,784 ------------------- Nonutility property 7,301 7,287 Current assets: Cash and equivalents 3,832 11,904 Accounts receivable: Customers 4,515 4,808 Other 178 339 Accrued utility revenue 6,102 2,600 Materials and supplies, at average cost 545 632 Prepaid expenses 686 587 ------------------- 15,858 20,870 ------------------- Other assets: Investment in California Water Service Group 32,483 23,099 Unamortized debt issuance and reacquisition costs 3,988 4,143 Goodwill 2,085 2,170 Regulatory assets 4,598 3,711 Other 561 472 ------------------- 43,715 33,595 ------------------- $323,223 296,536 ==================== CONSOLIDATED BALANCE SHEET (Continued) SJW CORP. AND SUBSIDIARIES December 31 (in thousands, except share data) CAPITALIZATION AND LIABILITIES 1997 1996 Capitalization: Shareholders' equity: Common stock, $3.125 par value; authorized 6,000,000 shares; issued 3,170,347 shares in 1997 and 1996 $ 9,907 9,907 Additional paid-in capital 19,235 19,235 Retained earnings 95,954 87,966 Accumulated other comprehensive income 8,457 2,920 ------------------- 133,553 120,028 Long-term debt, less current maturities 75,000 75,000 ------------------- 208,553 195,028 ------------------- Current liabilities: Current maturities of long-term debt - 1,500 Accrued pump taxes and purchased water 2,072 1,992 Accounts payable 738 315 Accrued interest 2,657 2,665 Accrued taxes other than income taxes 407 344 Other current liabilities 3,066 2,138 ------------------- 8,940 8,954 ------------------- Deferred income taxes 21,904 16,058 Unamortized investment tax credits 2,304 2,359 Advances for construction 45,455 39,217 Contributions in aid of construction 33,268 31,959 Deferred revenue 1,120 1,004 Other nonconcurrent liabilities 1,679 1,957 Commitments - - ------------------- $323,223 296,536 =================== See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME SJW CORP. AND SUBSIDIARIES Years ended December 31 (in thousands, except share data) 1997 1996 1995 Operating revenue $110,084 102,593 97,385 Operating expense: Operation: Purchased water 24,341 21,914 19,389 Power 4,004 4,099 4,781 Pump taxes 15,293 14,079 14,969 Other 17,744 17,139 18,200 Maintenance 7,087 6,851 6,342 Property taxes and other nonincome taxes 3,344 3,168 2,996 Depreciation and amortization 8,847 8,671 7,626 Income taxes 10,110 9,066 7,768 ------------------------------- 90,770 84,987 82,071 ------------------------------- Operating income 19,314 17,606 15,314 Other (expense) income: Interest on long-term debt (5,695) (5,892) (4,888) Gain on sale of nonutility property, net - 5,269 - Dividends 1,160 1,144 1,122 Other 437 433 (13) -------------------------------- Net income $ 15,216 18,560 11,535 -------------------------------- Other Comprehensive Income: Unrealized gain on investment 9,384 5,087 413 Income taxes related to other comprehensive income (3,847) (2,085) (170) --------------------------------- Other comprehensive income, net 5,537 3,002 243 -------------------------------- Comprehensive income 20,753 21,562 11,778 ================================ Basic earnings per share $ 4.80 5.75 3.55 ================================ Comprehensive income per share $ 6.55 6.68 3.62 ================================ Weighted average shares outstanding 3,170,347 3,226,647 3,250,746 ================================= See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY SJW CORP. AND SUBSIDIARIES (in thousands) Accumulated Additional Other Com- Total Common Paid-in Retained prehensive Shareholders' Stock Capital Earnings Income Equity Balances, December 31, 1994 10,159 22,208 72,056 (325) 104,098 Net income - - 11,535 - 11,535 Other comprehensive income - unrealized gain on investment, net of tax effect of $170 - - - 243 243 ------ Comprehensive Income 11,778 Dividends paid - - (7,022) - (7,022) - ----------------------------------------------------------------------- Balances, December 31, 1995 10,159 22,208 76,569 (82) 108,854 Net income - - 18,560 - 18,560 Other comprehensive income - unrealized gain on investment, net of tax effect of $2,085 - - - 3,002 3,002 ------ Comprehensive Income 21,562 Purchase and retire- ment of common stock (252) (2,973) - - (3,225) Dividends paid - - (7,163) - (7,163) - ---------------------------------------------------------------------- Balances, December 31, 1996 9,907 19,235 87,966 2,920 120,028 Net income - - 15,216 - 15,216 Other comprehensive income - unrealized gain on investment, net of tax effect of $3,847 - - - 5,537 5,537 ------ Comprehensive Income 20,753 Dividends paid - - (7,228) - (7,228) - ---------------------------------------------------------------------- Balances, December 31, 1997 $9,907 19,235 95,954 8,457 133,553 - ---------------------------------------------------------------------- See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENT OF CASH FLOWS SJW CORP. AND SUBSIDIARIES Years ended December 31 (in thousands) 1997 1996 1995 Operating activities: ---- ---- ---- Net income $ 15,216 $ 18,560 11,535 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,847 8,671 7,626 Deferred income taxes and credits 1,943 287 274 Gain on sale of nonutility property - (5,269) - Changes in operating assets and liabilities: Accounts receivable and accrued utility revenue (3,048) 752 41 Accounts payable and other current liabilities 1,351 (1,075) (200) Accrued pump taxes and purchased water 80 (1,750) 539 Prepaid expenses (99) (8) 1,383 Other changes, net (392) (869) 979 ---------------------------- Net cash provided by operating activities 23,898 19,299 22,177 --------------------------- Investing activities: Additions to utility plant (24,109) (20,065) (18,710) Cost to retire utility plant, net of salvage (720) (273) (491) Additions to nonutility property (82) (1,069) (328) (Purchase) sale of temporary investments - 4,300 (4,300) Proceeds from sale of machine shop - - 1,954 Proceeds from sale of nonutility property - 7,767 - Water system leasehold acquisition cost (6,800) - - --------------------------- Net cash used in investing activities (31,711) (9,340) (21,875) --------------------------- Financing activities: Dividends paid (7,228) (7,163) (7,022) Repayment of line of credit - - (7,000) Borrowings from line of credit - - 2,200 Advances and contributions in aid of construction 9,944 7,325 5,585 Refunds of advances (1,475) (1,406) (1,428) Proceeds from issuance of long-term debt - - 15,000 Principal payments of long-term debt (1,500) (1,000) (1,500) Purchase and retirement of common stock - (3,225) - -------------------------- Net cash provided by (used in) financing activities (259) (5,469) 5,835 -------------------------- Net change in cash and equivalents (8,072) 4,490 6,137 Cash and equivalents, beginning of year 11,904 7,414 1,277 -------------------------- Cash and equivalents, end of year $ 3,832 11,904 7,414 ========================== Cash paid during the year for: Interest $ 5,993 5,607 5,284 Income taxes $ 8,846 11,443 5,810 See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1997, 1996 and 1995 (Dollars in thousands, except share data) Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of SJW Corp. and its wholly owned subsidiaries. Intercompany transactions and balances have been eliminated. SJW Corp.'s principal subsidiary, San Jose Water Company, is a regulated California water utility providing water service to the greater metropolitan San Jose area. San Jose Water Company's accounting policies comply with the applicable uniform system of accounts prescribed by the California Public Utilities Commission (the "Commission") and conform to generally accepted accounting principles for rate-regulated public utilities. More than 90% of San Jose Water Company's revenue is derived from the sale of water to residential and business customers. SJW Land Company owns and operates a 900-space surface parking facility adjacent to the San Jose Arena, and also owns several undeveloped real estate parcels in San Jose. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Utility Plant - The cost of additions, replacements and betterments to utility plant is capitalized. The amount of interest capitalized in 1997, 1996, and 1995 was $290, $201, and $245, respectively. Construction in progress was $2,693 in 1997, $2,021 in 1996, and $1,813 in 1995. Depreciation is computed using the straight-line method over the estimated service lives of the assets, ranging from 5 to 75 years. The cost of utility plant retired, including retirement costs (less salvage), is charged to accumulated depreciation, and no gain or loss is recognized. Rate-regulated enterprises are required to charge a regulatory asset to earnings if and when that asset no longer meets the criteria for being recorded as a regulatory asset. Intangible Assets - Intangible assets consist of leasehold acquisition cost for the City of Cupertino municipal water system and turnouts constructed for the Santa Clara Valley Water District to facilitate water delivery. All intangible assets are recorded at cost and are amortized using the straight-line method over the legal or economic life of the asset, whichever is shorter, not to exceed forty years. Nonutility Property - Nonutility property is recorded at cost and consists primarily of land and parking facilities. Depreciation is computed using accelerated depreciation method over the estimated useful lives of the assets, ranging from 5 to 15 years. Financial Instruments - Cash and equivalents include certain highly liquid investments with remaining maturities of three months or less when purchased. Cash equivalents are stated at cost plus accrued interest, which approximates fair value. Investment in California Water Service Group - SJW Corp.'s investment in California Water Service Group (formerly California Water Service Company) is reported at quoted market price, with the unrealized gain or loss reported as other comprehensive income. The accumulated balance of other comprehensive income is reported in the equity section of the financial statements. The fair value of SJW Corp.'s investment in California Water Service Group approximated $32,483 and $23,099 as of December 31, 1997 and 1996, respectively. The increase in fair value of $9,384, after offsetting deferred income taxes of $3,847, resulted in a net increase of $5,537 to accumulated other comprehensive income as of December 31, 1997. Other Assets - Debt reacquisition costs are amortized over the term of the new debt. Debt issuance costs are amortized over the life of each issue. The excess cost over fair market value of net assets acquired is recorded as goodwill and amortized over the periods estimated to be benefited, not exceeding 40 years. Management periodically evaluates the recoverability of goodwill by assessing whether the amortization of the balance over the remaining life can be recovered through expected and undiscounted future results to determine if an impairment has occurred. Income Taxes - Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the effect of temporary differences between financial and tax reporting. Deferred tax assets and liabilities are measured using enacted tax rates applicable to future years. To the extent that the tax benefits of the temporary differences have previously been passed through to customers through lower water rates, management anticipates that the payment of the future tax liabilities resulting from the reversal of the temporary differences will be recoverable through rates. Therefore, a regulatory asset has been recorded for the portion of net deferred tax liabilities which are expected to be recovered through future rates. Although realization is not assured, management believes it is more likely than not that all of the regulatory asset will be realized. To the extent permitted by the Commission, investment tax credits resulting from utility plant additions are deferred and amortized over the estimated useful lives of the related property. Advances for Construction and Contributions in Aid of Construction - Advances for construction received after 1981 are being refunded ratably over 40 years. Prior customer advances are refunded based on 22% of related revenues. Estimated refunds for 1998 are $1,562. Contributions in aid of construction represent funds received from developers that are not refundable under Commission regulations. Depreciation applicable to utility plant constructed with these contributions is charged to contributions in aid of construction. Customer advances and contributions in aid of construction received subsequent to 1986 and prior to June 12, 1996 generally must be included in federal taxable income. Taxes paid relating to advances and contributions are recorded as deferred tax assets for financial reporting purposes and are amortized over 40 years for advances, and over the tax depreciable life of the related asset for contributions. Receipts subsequent to June 12, 1996 are generally exempt from federal taxable income. Advances and contributions received subsequent to 1991 and prior to 1997 are included in state taxable income. Other Comprehensive Income - In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130 requires that all items of comprehensive income be classified separately and the accumulated balance of comprehensive income be reported in the equity section of the financial statements. SJW Corp. adopted SFAS No. 130 during 1997, retroactively, with prior years restated. The corporation has one major item of comprehensive income which relates to the unrealized gain on the California Water Service Group investment. The adoption of SFAS No. 130 did not have a material effect on the corporation's financial condition. Revenue - Revenue of San Jose Water Company includes amounts billed to customers, and unbilled amounts based on estimated usage from the latest meter reading to the end of the year. Included in 1997's and 1996's operating revenue are $890 and $631 relating to recovery of prior years' net revenue lost due to voluntary conservation programs. Operating revenue for 1997 includes $463 from the lease operation of City of Cupertino. Earnings Per Share - In 1997, SJW Corp. adopted SFAS No. 128, Earnings per Share. SFAS No. 128 changes the standards for computing earnings per share (EPS) by replacing the presentation of primary EPS with basic EPS for all periods presented. 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. The adoption of SFAS No. 128 had no effect on the corporation's earnings per share amounts. SJW Corp. has no dilutive securities, and accordingly, diluted EPS is not shown. Note 2 CAPITALIZATION At December 31, 1997, and 1996, 176,407 shares of $25 par value preferred stock were authorized and unissued. In 1996, SJW Corp. repurchased 80,399 shares of its outstanding stock at the prevailing market price at an aggregate cost of $3,225. All repurchased shares have been canceled and are considered authorized and unissued. Note 3 LINE OF CREDIT SJW Corp. and its subsidiaries have available an unsecured bank line of credit, allowing aggregate short-term borrowings of up to $20,000. This line of credit bears interest at variable rates and expires on May 31, 1999. Note 4 GAIN ON SALE OF NONUTILITY PROPERTY In September 1996, SJW Land Company sold nonutility property receiving as consideration $6,750 in cash and a parcel of nonutility property with a fair value of $1,050. The transaction resulted in a gain of $5,269, net of income tax expense of $2,155, or $1.62 per share. Note 5 LONG-TERM DEBT Long-term debt as of December 31 was as follows: Description Due Date 1997 1996 ------------------------------------------------- First mortgage bond: P 6.5% 1997 $ - 1,500 ------------------------------------------------- Senior notes: A 8.58% 2022 20,000 20,000 B 7.37% 2024 30,000 30,000 C 9.45% 2020 10,000 10,000 D 7.15% 2026 15,000 15,000 ------------------------------------------------- 75,000 75,000 ------------------------------------------------- Total long-term debt 75,000 76,500 Less current maturities - 1,500 ------------------------------------------------- $75,000 75,000 ================================================= Senior notes are obligations of San Jose Water Company and are unsecured. To minimize issuance costs, all of San Jose Water Company's debt has historically been privately placed. The fair value of long-term debt as of December 31, 1997 and 1996 was approximately $94,500 and $86,500 respectively based on the amount of essentially risk-free assets that would have to be placed in trust to extinguish these obligations. Note 6 INCOME TAXES The following table reconciles income tax expense to the amount computed by applying the federal statutory rate to income before income taxes: 1997 1996 1995 Computed "expected" federal --------------------------- income tax at the statutory rate of 35% $8,864 10,423 6,756 Increase (decrease) in taxes attributable to: Utility plant basis 180 462 400 State taxes, net of federal income tax benefit 1,531 1,800 1,167 Dividend received deduction (284) (280) (275) Nonutility property sale - (922) - Other items, net (181) (262) (280) -------------------------------------------------------------- $10,110 11,221 7,768 ============================================================== The components of income tax expense as of December 31 were: 1997 1996 1995 -------------------------------------------------------------- Current: Federal $6,657 7,830 5,564 State 2,225 2,961 2,041 Deferred: Federal 1,230 907 549 State (2) (477) (386) -------------------------------------------------------------- $10,110 11,221 7,768 ============================================================== The components of the net deferred tax liability as of December 31 were as follows: 1997 1996 -------------------------------------------------------------- Deferred tax assets: Advances and contributions $12,989 12,252 Unamortized investment tax credit 1,240 1,277 Pensions and postretirement benefits 438 596 California franchise tax 685 668 Other 454 257 -------------------------------------------------------------- Total deferred tax assets 15,806 15,050 -------------------------------------------------------------- Deferred tax liabilities: Utility plant 24,467 21,965 Investment 11,063 7,215 Debt reacquisition costs 1,289 1,355 Other 891 573 -------------------------------------------------------------- Total deferred tax liabilities 37,710 31,108 -------------------------------------------------------------- Net deferred tax liabilities $21,904 16,058 ============================================================== Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the company will realize the benefits of these deductible differences. Note 7 EMPLOYEE BENEFIT PLANS Pension Plans - San Jose Water Company sponsors noncontributory defined benefit pension plans. Benefits under the plans are based on an employee's years of service and highest consecutive three years of compensation. San Jose Water Company's policy is to contribute the net periodic pension cost to the extent it is tax deductible. San Jose Water Company has a Supplemental Executive Retirement Plan, which is a defined benefit plan under which the company will pay supplemental pension benefits to key executives in addition to the amounts received under the retirement plan. The annual cost of this plan has been included in the determination of the net periodic pension cost shown below. The plan, which is unfunded, had a projected benefit obligation of $1,713 and $1,413 as of December 31, 1997 and 1996, respectively, and net periodic pension cost of $222, $193 and $159 for 1997, 1996 and 1995, respectively. Net periodic pension cost for the defined benefit plans was: 1997 1996 1995 -------------------------------------------------------------- Service cost-benefits earned during the period $ 886 869 536 Interest cost on projected benefit obligation 1,590 1,444 1,349 Actual return on plan assets (4,626) (3,767) (3,896) Net amortization and deferral 2,633 2,146 2,403 -------------------------------------------------------------- $ 483 692 392 ============================================================== The actuarial present value of benefit obligations and the funded status of San Jose Water Company's defined benefit pension plans as of December 31 were as follows: 1997 1996 -------------------------------------------------------------- Actuarial present value of accumulated benefit obligation, including vested benefits of $18,687 and $16,981 $(20,621) (18,686) -------------------------------------------------------------- Projected benefit obligation (25,625) (23,314) Plan assets at fair value 30,336 25,813 -------------------------------------------------------------- Plan assets in excess of projected benefit obligation 4,7ll 2,499 Unrecognized net gain (6,533) (4,532) Prior service cost not recognized in net periodic pension cost l,545 1,331 Unrecognized net obligation at January 1, 1987 and 1992 being recognized over 15 and 13.7 years 2l8 221 -------------------------------------------------------------- Accrued pension cost included in other current liabilities $ (59) (481) ============================================================== The plans invest primarily in listed stocks, bonds, government securities and cash and use the projected unit credit actuarial cost method. Average remaining service lives were 14.3 and 14.5 years for 1997 and 1996 respectively. In determining net periodic pension cost for 1997, 1996 and 1995 the following assumptions were used: weighted average discount rate, 6.75%, 6.5% and 8.5%, respectively; compensation growth rate, 4.0%, 4.0% and 5.0%, respectively; and rate of return on plan assets, 8.0% for all years. In determining accrued pension cost as of December 31, 1997 and 1996, the following assumptions were used: weighted average discount rate, 6.75% for both years; and compensation growth rate, 4.0% for both years. Savings Plans - San Jose Water Company sponsors savings plans which allow employees to defer and contribute a portion of their earnings to the plans. Contributions, not to exceed set limits, are matched 50% by the company. Company contributions were $425, $366 and $345 in 1997, 1996 and 1995, respectively. Other Postretirement Benefits - In addition to providing pension and savings benefits, San Jose Water Company provides health care and life insurance benefits for retired employees. Net periodic postretirement benefit costs were as follows: 1997 1996 1995 -------------------------------------------------------------- Service cost - benefits earned during the period $39 48 28 Interest cost on benefit obligation 91 89 87 Actual return on plan assets (13) (9) (5) Net amortization and deferral 43 51 28 -------------------------------------------------------------- $160 179 138 -------------------------------------------------------------- Benefits paid were $79, $71, and $72 in 1997, 1996 and 1995, respectively. The plan's combined funded status and the related accrual as of December 31 were as follows: 1997 1996 --------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $(578) (593) Active plan participants: Fully eligible (254) (180) Other (605) (646) -------------------------------------------------------------- (1,437) (1,419) Plan assets 350 291 -------------------------------------------------------------- Accumulated postretirement obligation in excess of plan assets (l,087) (1,128) Unrecognized net gain from past experience and changes in assumptions (214) (231) Unrecognized net transition obligation 792 886 -------------------------------------------------------------- Accrued postretirement benefit cost included in other current liabilities $(509) (473) ============================================================== In 1997, the plan was changed to a flat dollar plan which is unaffected by variations in health care costs. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 6.75% for 1997 and 1996. In determining the net periodic postretirement benefit cost, 6.75% and 6.5% discount rates were used respectively for 1997 and 1996. Note 8 LEASE OF CITY OF CUPERTINO MUNICIPAL WATER SYSTEM For a one-time concession fee of $6,800, San Jose Water Company acquired a 25-year lease to operate the City of Cupertino's water utility effective October 1, 1997. The concession fee is recognized as an intangible asset and is amortized ratably over the term of the lease. Under the terms of the lease agreement, San Jose Water Company assumed responsibility for all maintenance, operating and capital costs, while receiving all payments for water service. Water service rates will be subject to approval by the Cupertino City Council. Note 9 COMMITMENT San Jose Water Company purchases water from the Santa Clara Valley Water District (SCVWD). Delivery schedules for purchased water are based on a contract year beginning July 1, and are negotiated every three years under terms of a master contract with SCVWD expiring in 2051. According to the contract terms, San Jose Water Company is obligated to purchase a minimum of 90% of the delivery schedule. The delivery schedule is established based on 95% of the water delivered to San Jose Water Company within the prior three years. Based on current prices and estimated deliveries, San Jose Water Company expects to purchase a minimum of $18,000 of water from SCVWD in the contract year ending June 30, 1998. NOTE 10 UNAUDITED QUARTERLY FINANCIAL DATA Summarized quarterly financial data is as follows: 1997 Quarter ended - ----------------------------------------------------------------- March June September December - ----------------------------------------------------------------- Operating revenue $20,787 31,554 34,037 23,706 Operating income 3,139 6,172 6,199 3,804 Net income 2,006 5,124 5,154 2,932 Comprehensive income 1,033 6,827 6,837 6,056 Basic earnings per share .63 1.62 1.63 .92 Comprehensive income per share .33 2.15 2.16 1.91 Market price range of stock: High 52 7/8 56 3/4 57 3/4 60 1/2 Low 46 48 51 3/4 56 3/8 Dividends per share .57 .57 .57 .57 - ----------------------------------------------------------------- 1996 Quarter ended - ----------------------------------------------------------------- March June September December - ----------------------------------------------------------------- Operating revenue $18,445 28,005 33,387 22,756 Operating income 2,588 5,014 6,426 3,578 Net income 1,480 3,929 10,579 2,572 Comprehensive income 2,210 3,930 11,593 3,829 Basic earnings per share .46 1.21 3.26 .82 Comprehensive income per share .68 1.21 3.57 1.22 Market price range of stock: High 41 1/2 39 1/4 42 1/2 48 1/4 Low 36 32 33 1/2 39 1/8 Dividends per share .555 .555 .555 .555 - ----------------------------------------------------------------- FINANCIAL STATEMENT SCHEDULE SJW CORP. - Schedule II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES ------------ YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 Description 1997 1996 1995 - ----------- ---- ---- ---- Allowance for doubtful accounts Balance, beginning of period 50,000 50,000 50,000 Charged to expense 170,812 174,275 222,163 Accounts written off (150,991) (205,034) (255,449) Recoveries of accounts written off 30,179 30,759 33,286 ---------------------------- Balance, end of period 100,000 50,000 50,000 ============================ Reserve for self insurance Balance, beginning of period 512,641 500,044 309,467 Charged to expense 180,000 128,500 278,100 Payments (102,939) (115,903) (87,523) ---------------------------- Balance, end of period 589,702 512,641 500,044 ============================ Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III The Company's Proxy Statement for its 1998 Annual Meeting of Shareholders, which was filed on February 27, 1998 pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is incorporated by reference in this Form 10-K pursuant to General Instruction G(3) of Form 10-K, provides the information required under Part III (Items 10, 11, 12 and 13), except for the information with respect to the Company's executive officers which is included in "Item 1. Business - Executive Officers of the Registrant." PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) (1) Financial Statements Page Independent Auditors' Report, January 23, 1998 19 Consolidated Balance Sheet as of December 31, 1997 and 1996 20 Consolidated Statement of Income and Comprehensive Income for the years ended December 31, 1997, 1996, and 1995. 22 Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 23 Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1996 and 1995 24 Notes to Consolidated Financial Statements 25 (2) Financial Statement Schedule: Schedule Number II Valuation and Qualifying Accounts and 35 Reserves, Years ended December 31, 1997, 1996 and 1995 All other schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. (3) Exhibits required to be filed by Item 601 of Regulation S-K. See Exhibit Index located immediately following paragraph (b) of this Item 14. The exhibits filed herewith are attached hereto (except as noted) and those indicated on the Exhibit Index which are not filed herewith were previously filed with the Securities and Exchange Commission as indicated. (b) Report on Form 8-K. There have been no reports filed on Form 8-K during the last quarter of the period covered by this report. EXHIBIT INDEX - -------------- Location in Sequentially Exhibit Numbered No. Description Copy 2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession: 2.1 Stock Exchange Agreement dated as of August 20, 1992 (as amended October 21, 1992). Filed as Appendix A to Proxy Statement/Prospectus dated November 11, 1992. File No. 1-8966. NA 2.2 Registration Rights Agreement entered into as of December 31, 1992 among SJW Corp., Roscoe Moss, Jr. and George E. Moss. Filed as Exhibit 4.1 to Form 8-K January 11, 1993. File No. 1-8966. NA 2.3 Affiliates Agreement entered into as of December 31, 1992 among SJW Corp., Roscoe Moss, Jr. and George E. Moss. Filed as Exhibit 4.2 to Form 8-K January 11, 1993. File No. 1-8966. NA 2.4 Affiliates Agreement entered into as December 31, 1992 among SJW Corp., Roscoe Moss Company and Roscoe Moss, Jr. Filed as Exhibit 4.3 to Form 8-K January 11, 1993. File No. 1-8966. *NA 3 Articles of Incorporation and By-Laws: 3.1 Restated Articles of Incorporation and By-Laws of SJW Corp., defining the rights of holders of the equity securities of SJW Corp. Filed as an Exhibit to Annual Report on Form 10-K for the year ended December 31, 1991. SEC File No. 1-8966. NA 4 Instruments Defining the Rights of Security Holders, including Indentures: No current issue of the registrant's long-term debt exceeds 10 percent of the total assets of the Company. The Company hereby agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of unregistered senior and subordinated debt of the Company. NA
Location in Sequentially Exhibit Numbered No. Description Copy 10 Material Contracts: 10.1 Water Supply Contract dated January 27, 1981 between San Jose Water Works and the Santa Clara Valley Water District, as amended. Filed as an Exhibit to Annual Report on Form 10-K for the year ended December 31, 1991. File No. 1-8966. NA Executive Compensation Plans and Arrangements: 10.2 Resolutions for Directors' Retirement Plan adopted by SJW Corp. Board of Directors, as amended. Filed as an Exhibit to Annual Report on Form 10-K for the year ended December 31, 1991. S.E.C. File No. 1-8966. NA 10.3 Resolutions for Directors' Retirement Plan adopted by San Jose Water Company Board of Directors, as amended. Filed as an Exhibit to Annual Report on Form 10-K for the year ended December 31, 1991. S.E.C. File No. 1-8966. NA 10.4 Ninth amendment to San Jose Water Company Retirement Plan as amended. Filed as an Exhibit to Annual Report on Form 10K for the year ended December 31, 1996, S.E.C. File No. 1-8966. NA 10.5 San Jose Water Company Executive Supplemental Retirement Plan adopted by San Jose Water Company Board of Directors. Filed as an Exhibit to Annual Report on Form 10-K for the year ended December 31, 1992. S.E.C. File No. 1-8966. NA 10.6 First Amendment to San Jose Water Company Executive Supplemental Retirement Plan adopted by San Jose Water Company Board of Directors. Filed as an Exhibit to Annual Report on Form 10-K for the year ended December 31, 1992. S.E.C. File No. 1-8966. NA 21 Subsidiaries of the Registrant. Filed as an Exhibit to Annual Report on Form 10-K for the year ended December 31, 1992. S.E.C. File No. 1-8966. NA 99 Additional Exhibits: None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: January 29, 1998 By /s/ J.W. WEINHARDT, Chairman, Chief Executive Officer and Member, Board of Directors Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: January 29, 1998 By /s/ J.W. WEINHARDT, Chairman, Chief Executive Officer and Member, Board of Directors Date: January 29, 1998 By /s/ W.R. ROTH, President, and Member, Board of Directors Date: January 29, 1998 By /s/ ANGELA YIP, Chief Financial Officer (Chief Accounting Officer) Date: January 29, 1998 By /s/ MARK L. CALI Member, Board of Directors Date: January 29, 1998 By /s/ J. PHILIP DINAPOLI Member, Board of Directors Date: January 29, 1998 By /s/ DREW GIBSON Member, Board of Directors Date: January 29, 1998 By /s/ RONALD R. JAMES Member, Board of Directors Date: January 29, 1998 By /s/ GEORGE E. MOSS Member, Board of Directors Date: January 29, 1998 By /s/ ROSCOE MOSS, JR. Member, Board of Directors Date: January 29, 1998 By /s/ CHARLES J. TOENISKOETTER Member, Board of Directors In accordance with the Securities and Exchange Commission's requirements, the Company will furnish copies of any exhibit upon payment of a 30 cents per page fee. To order any exhibit(s), please advise the Secretary, SJW Corp., 374 West Santa Clara Street, San Jose, CA 95196, as to the exhibit(s) desired. On receipt of your request, the Secretary will provide to you the cost of the specific exhibit(s). The Secretary will forward the requested exhibits upon receipt of the required fee.