FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1998
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Commission file number 1-8966
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SJW Corp.
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(Exact name of registrant as specified in its charter)
California 77-0066628
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
374 West Santa Clara Street, San Jose, CA 95196
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(Address of principal executive offices) (Zip Code)
408-279-7800
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year changed since
last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Common shares outstanding as of November 12, 1998 and as of the
date of this report are 3,168,847.
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
--------------------
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
(In thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
---------------------------------------
Operating revenue $ 35,821 34,037 80,665 86,378
Operating expense:
Operation:
Purchased water 9,187 7,240 18,646 20,415
Power 1,328 1,657 2,627 3,140
Pump taxes 4,996 6,002 9,682 11,097
Other 4,414 4,601 12,975 13,287
Maintenance 1,697 1,745 5,198 5,319
Property and other
nonincome taxes 916 810 2,653 2,475
Depreciation and
amortization 2,392 2,195 7,188 6,584
Income taxes 3,923 3,588 7,348 8,551
---------------------------------------
Total operating expenses 28,853 27,838 66,317 70,868
---------------------------------------
Operating income 6,968 6,199 14,348 15,510
Gain on sale on nonutility
property, net of tax - - 1,629 -
Other income 88 225 349 624
Dividend income 294 290 883 870
Interest and other charges (1,543) (1,560) (4,686) (4,720)
---------------------------------------
Net income $ 5,807 5,154 12,523 12,284
=======================================
Other comprehensive income(loss):
Unrealized gain(loss)
on investment (2,749) 2,853 (7,596) 4,091
Income taxes related to
other comprehensive
income (loss) 1,127 (1,169) 3,114 (1,677)
---------------------------------------
Other comprehensive
Income (loss), net (1,622) 1,684 (4,482) 2,414
---------------------------------------
Comprehensive income $ 4,185 6,838 8,041 14,698
=======================================
Basic earnings per share $ 1.83 1.63 3.95 3.87
Comprehensive income
per share $ 1.32 2.16 2.54 4.64
Dividends per share $ .585 0.57 1.755 1.71
Weighted average
shares outstanding 3,170,347 3,170,347 3,170,347 3,170,347
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(In thousands)
SEPTEMBER 30 DECEMBER 31
1998 1997
--------------------------
ASSETS
Utility plant $ 397,179 371,200
Less accumulated depreciation
and amortization 122,324 114,851
-----------------------
Net utility plant 274,855 256,349
Nonutility property 11,406 7,301
Current assets:
Cash and equivalents 414 3,832
Accounts receivable and accrued revenue 17,484 10,795
Prepaid expenses and other 1,360 1,231
-----------------------
Total current assets 19,258 15,858
Other assets:
Investment in California
Water Service Group 24,886 32,483
Debt issuance and reacquisition costs 3,872 3,988
Regulatory assets 4,590 4,598
Goodwill 2,021 2,085
Other 1,163 561
-----------------------
Total other assets 36,532 43,715
-----------------------
$342,051 323,223
=======================
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock $ 9,907 9,907
Additional paid-in capital 19,235 19,235
Retained earnings 102,913 95,954
Accumulated other comprehensive income 3,975 8,457
-----------------------
Total common shareholders' equity 136,030 133,553
Long-term debt, less current maturities 75,000 75,000
-----------------------
Total capitalization 211,030 208,553
Current liabilities:
Line of credit 4,700 -
Accounts payable 3,501 738
Accrued interest 1,650 2,657
Accrued pump taxes and purchased water 4,351 2,072
Income and nonincome taxes payable 4,868 581
Other current liabilities 3,814 2,892
-----------------------
Total current liabilities 22,884 8,940
Deferred income taxes and tax credits 22,897 24,208
Other noncurrent liabilities 2,918 2,799
Advances for and contributions in aid
of construction 82,322 78,723
-----------------------
$342,051 323,223
=======================
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30
1998 1997
------------------
Operating activities:
Net income 12,523 12,284
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,188 6,584
Deferred income taxes and credits (1,311) 2,177
Gain on sale of nonutility property (1,629) -
Changes in operating assets and liabilities:
Accounts receivable and accrued revenue (6,689) (4,698)
Prepaid expenses and other (129) (271)
Accounts payable and other
current liabilities 3,685 2,017
Accrued pump taxes and purchased water 2,279 2,020
Income and nonincome taxes payable 4,287 3,027
Accrued interest (1,007) (1,021)
Other changes, net 1,809 (909)
-------------------
Net cash provided by operating activities 21,006 21,210
-------------------
Investing activities:
Additions to utility plant (26,493) (17,643)
Additions to nonutility property (4,362) (26)
Cost to retire utility plant (95) (329)
Net cash proceeds from sale of
non-utility property 3,073 -
-------------------
Net cash used in investing activities (27,877) (17,998)
-------------------
Financing activities:
Dividends paid (5,564) (5,421)
Line of credit 4,700 -
Retirement of long-term debt - (1,500)
Advances and contributions in
aid of construction 5,407 8,566
Refunds of advances (1,090) (1,088)
-------------------
Net cash provided by financing activities 3,453 557
-------------------
Net change in cash and equivalents (3,418) 3,769
Cash and equivalents, beginning of period 3,832 11,904
-------------------
Cash and equivalents, end of period $ 414 15,673
===================
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $ 5,498 5,521
Income taxes 3,138 5,503
SJW CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
NOTE I - General
In the opinion of SJW Corp., the accompanying unaudited
condensed consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the results for the
interim periods.
The Notes to Consolidated Financial Statements incorporated
by reference in SJW Corp.'s 1997 Annual Report on Form 10-K
should be read with the accompanying condensed consolidated
financial statements.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources:
A private placement of $15,000,000 of unsecured 30-year
senior notes is scheduled to close in December 1998.
Proceeds from the sale of the unsecured notes will be used to
repay short- term borrowings and fund construction
expenditures through the first half of 1999.
SJW Corp. and its subsidiaries have a commercial bank line of
credit that provides for unsecured borrowings of up to
$20,000,000 at rates which approximate the bank's prime or
reference rate. At September 30, 1998, SJW Corp. had
available an unused short-term bank line of credit of
$15,300,000.
San Jose Water Company's capital expenditures are incurred in
connection with normal upgrading and expansion of existing
facilities and to comply with environmental regulations.
Capital expenditures for the next five years are likely to
increase from historical levels due to the addition of new,
or expansion of existing, water treatment and source of
supply facilities and to comply with environmental
regulations. Net capital expenditures for 1998 are estimated
at $20,300,000. For the five year period from 1999 to 2003,
San Jose Water Company's net capital expenditures are
estimated to aggregate $110,000,000. Net capital
expenditures represent gross capital expenditures less
advances and contributions in aid of construction.
General:
SJW Corp. is a holding company created in 1985 through an
agreement of merger with San Jose Water Company. SJW Corp.
has operational and financial flexibility and can engage in
nonutility activities. SJW Corp. owns 1,099,952 shares of
California Water Service Group.
San Jose Water Company is a public utility in the business of
providing water service to approximately 965,000 people in
the metropolitan San Jose area.
SJW Land Company, a wholly owned subsidiary, was formed in
1985 for the purpose of real estate development. It operates
parking facilities located adjacent to the Company's
headquarters and the San Jose Arena.
Results of Operations (dollars in thousands):
Overview
SJW Corp.'s consolidated net income for the third quarter of
1998 was $5,807, an increase of 13% from $5,154 in the third
quarter of 1997.
Earnings for the nine months of 1998 increased 2% over the
same period in 1997. Included in the 1998 nine months results
was a net of tax nonrecurring gain on sale of land of $1,629.
Operating Revenue
The change in consolidated operating revenue from the same
period in 1997 was due to the following factors:
Operating Three months ended Nine months ended
revenue September 30 1998vs1997 September 30 1998vs1997
Increase/(decrease) Increase/(decrease)
-------------------------------------------------------------
Utility:
Consumption $ 901 2.6% (7,355) (8.5)%
New customers 597 1.8 1,590 1.8
Rate increases 397 1.1 253 .3
Real estate (111) (.3) (201) (0.2)
---------------------------------------------
$1,784 5.2% (5,713) (6.6)%
=============================================
Average usage per metered customer in the third quarter of
1998 was 2% higher than the third quarter of 1997. Year-
to-date metered customer usage decreased 11% in comparison to
the same period in 1997. Unusually wet and cool weather
conditions for the first half of 1998 caused customer usage
and revenue to be significantly lower than 1997 levels.
Operating expense
The change in consolidated operating expense, excluding
income taxes, from the same period in 1997 was due to the
following:
Operating Three months ended Nine months ended
Expense September 30 1998vs1997 September 30 1998vs1997
Increase/(decrease) Increase/(decrease)
----------------------------------------------------------
Operation and
maintenance $377 1.6% (4,130) (6.6)%
Depreciation 197 0.8 604 0.9
General taxes 106 0.4 178 0.3
-------------------------------------------
$680 2.8% (3,348) (5.4)%
===========================================
The higher third quarter operation and maintenance expense
was attributable to increased water production cost due to
higher water consumption. The increase in production cost
was partially offset by lower purchased power cost and higher
availability of non-contract water at reduced cost from the
Santa Clara Valley Water District. Year-to-date operation
and maintenance expense decreased due to reduced customer
consumption as a result of mild weather.
Other
The effective income tax rate in the third quarter of 1998
was about the same as the third quarter of 1997. Year-to-
date income tax rate including the income taxes on the gain
on sale of land was about the same as the same period last
year.
Since the water business is highly seasonal in nature, a
comparison of the revenue and expense of the current quarter
with the immediately preceding quarter would not be
meaningful. Results of the first nine months of 1997 may not
be indicative of results for the full year.
Water Supply
On November 2, 1998, Santa Clara Valley Water District's 10
reservoirs were 64% full with 107,934 acre feet of water in
storage -- which is above average for the past 20 years.
While at the same time, the water level in the Santa Clara
ground water basin and the year to date rainfall approximated
the 30-year average.
Regulatory Affairs
The Public Utilities Commission of California rendered a rate
decision on July 17, 1996, approving .95%, 2.1%, 1.45% and
1.45% rate increases for 1996, 1997, 1998, and 1999,
respectively, for San Jose Water Company. These rate
increases are based on rates of return on rate base of 9.28%
and 9.25% for the years 1996 and 1997, respectively,
reflecting a return on common equity of 10.2%. The increases
for 1998 and 1999 are to offset operational and financial
attrition.
On January 1, 1998, San Jose Water Company received a step
rate increase in the amount of $1,100 or 1%. On September 8,
1998, a $2,600 rate increase was authorized to cover the
increase in purchased water and pump tax costs imposed on San
Jose Water Company by the Santa Clara Valley Water District.
Year 2000 Compliance
San Jose Water Company executives, as part of their operating
duties, are evaluating the Company's information technology
(IT) and non-IT systems to ensure all systems are prepared
for the year 2000. San Jose Water Company generally uses
software packages and hardware that are year 2000 compliant.
The Company has received confirmation from software and
hardware vendors that the systems are year 2000 compliant.
Whenever available, the Company has also received
certificates of compliance from independent testers.
San Jose Water Company has an IT master plan that identifies
systems that need to be replaced due to age, or need to be
changed to implement operating and customer service benefits.
The systems that are currently identified as non-compliant
were scheduled to be upgraded as part of the IT master plan.
The last of these regular upgrades will be complete in August
1999.
Management also contacted critical third party suppliers
regarding their year 2000 readiness. Suppliers of water,
power and other goods are critical to San Jose Water
Company's operations. The suppliers described their state of
readiness and contingency plans, if available. As of today,
Santa Clara Valley Water District (SCVWD) has indicated that
they are not in compliance with year 2000 because SCVWD
relies on the supply from the state government's Department
of Water Resources (DWR), and currently DWR is not in
compliance. DWR is actively undertaking plans to ensure that
they are in compliance by December 1998.
To date, there have been no significant costs associated
solely with year 2000 compliance issues. The Company does
not anticipate incurring material future costs directly
related to the year 2000 such as modifying software and
hiring year 2000 solution providers. No major IT projects
have been deferred due to year 2000 issues. The costs of
identifying the issue, evaluating the systems, inquiring
about third party suppliers' year 2000 preparedness and any
testing are currently being expensed. Future Year 2000
compliance consulting costs are expected to approximate $10
and will be expensed when incurred.
San Jose Water Company is developing a year 2000 contingency
plan and expects to have it in place by December 1998.
Because of the significance of the year 2000 problem to the
world, there can be no assurance that the Company will not be
affected by some aspect of the year 2000 problem. The above
information is provided for informational purposes and
neither guarantees or entitles the reader to any legal rights
or remedies.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In October 1993, Valley Title Company and its insurer filed a
lawsuit in Santa Clara County Superior Court against San Jose
Water Company and other defendants. Plaintiffs claimed a
fire service pipeline ruptured in October, 1992, causing
water and heating oil from an abandoned underground storage
tank to flood the title company's basement.
In April 1995, San Jose Water Company's insurance carrier,
under a reservation of rights, settled with the plaintiff
insurance company for $3.5 million for costs to repair the
building. It is uncertain whether or not San Jose Water
Company will be compelled to contribute to the settlement.
Management has consistently maintained that the pollution
exclusion asserted by its insurance carrier does not apply to
this type of incident, and therefore the Company will
aggressively resist any demand for contribution.
Separately, a jury awarded $3 million to the title company
for its loss of business files. A unanimous appellate court
reversed that judgment which was sustained by the California
Supreme Court.
In July 1998, Maxxum Management Company, successor to Valley
Title Company, filed a new lawsuit against San Jose Water
Company. The litigation is based upon the same facts as the
first lawsuit but alleges a cause of action in inverse
condemnation.
San Jose Water Company believes it will prevail in the new
lawsuit. If not, San Jose Water Company believes any future
award to the title company will be within the stated limits
of the company's insurance coverage.
In another matter, in June, 1995 the City of San Jose passed
an ordinance directed at San Jose Water Company and imposing
a franchise fee for the use of public streets for water
mains. The ordinance required San Jose Water Company to pay
the City an annual fee based upon future use of city streets.
San Jose Water Company sued to overturn the ordinance. The
company claimed it owns a state constitutional franchise
dating from before 1879 and that the City had no right to
impose a new franchise. San Jose Water Company won the case
and the City has appealed. The company does not believe that
the final legal result will have a material effect on its
financial position.
Item 5. OTHER INFORMATION
On October 22, 1998, the Board of Directors declared the
regular quarterly dividend of $.585 per common share. The
dividend will be paid December 1, 1998 to shareholders of
record as of the close of business on November 1, 1998.
In the same meeting, the Board of Directors also authorized a
stock repurchase program under which the corporation can
repurchase up to 250,000 shares of its common stock at open
market prices. Such repurchase will be effected over the
next eighteen months when market conditions are appropriate.
As of November 12, 1998, SJW Corp. has repurchased 1500
shares from the open market at the prevailing market price.
The shares repurchased have been cancelled and are considered
authorized and unissued.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits required to be filed by Item 601 of Regulation S-K.
There were no exhibits required to be filed by Item 601 of
Regulation S-K for the quarter ended September 30, 1998.
(b.) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter
ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SJW Corp.
Date: November 12, 1998 By /s/
------------------------------
Angela Yip
Chief Financial Officer
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