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
<PAGE>
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.
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