1
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 March 31, 1999
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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 May 1, 1999 and as of the
date of this report are 3,045,147.
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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
MARCH 31
1999 1998
-----------------------
Operating revenue $ 21,067 19,336
Operating expense:
Operation:
Purchased water 3,931 3,511
Power 561 488
Pump taxes 2,353 2,087
Other 4,760 4,518
Maintenance 1,621 1,755
Property taxes and other
non-income taxes 936 879
Depreciation and amortization 2,563 2,398
Income taxes 1,184 1,013
-----------------------
Total operating expenses 17,909 16,649
-----------------------
Operating income 3,158 2,687
Other income 131 120
Dividend income 298 294
Interest and other charges (1,806) (1,575)
-----------------------
Net income $ 1,781 1,526
=======================
Other comprehensive loss:
Unrealized loss on investment (7,493) (2,715)
Income taxes related to other
comprehensive loss 3,072 1,113
-----------------------
Other comprehensive loss, net (4,421) (1,602)
-----------------------
Comprehensive loss $ (2,640) (76)
=======================
Basic earnings per share $ 0.58 0.48
=======================
Comprehensive loss per share $ (0.86) (0.02)
=======================
Dividends per share of common stock $ 0.60
0.585
=======================
Weighted average shares outstanding 3,084 3,170
=======================
SJW CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(In thousands)
MARCH 31 DECEMBER 31
1999 1998
---------------------
ASSETS
Utility plant $410,401 403,227
Less accumulated depreciation and 125,304 122,809
amortization ---------------------
Net utility plant 285,097 280,418
Non-utility property 11,317 11,360
Current assets:
Cash and equivalents 593 8,066
Accounts receivable and accrued revenue 10,948 11,910
Prepaid expenses and other 981 1,249
---------------------
12,522 21,225
Other assets:
Investment in Calif. Water Service Group 26,949 34,442
Debt issuance and reacquisition costs 4,001 4,032
Regulatory assets 5,141 5,137
Goodwill 1,978 2,000
Other 780 766
---------------------
Total other assets 38,849 46,377
---------------------
$347,785 359,380
=====================
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock $ 9,516 9,899
Additional paid-in capital 12,356 19,085
Retained earnings 104,436 104,553
Accumulated other comprehensive income 5,191 9,612
---------------------
Shareholders' equity 131,499 143,149
Long-term debt 90,000 90,000
---------------------
Total capitalization 221,499 233,149
Current liabilities:
Line of credit 3,200 -
Accounts payable 1,185 2,163
Accrued interest 1,967 2,720
Accrued pump taxes and purchased water 1,964 2,423
Income and non-income taxes payable 3,005 1,353
Other current liabilities 2,450 3,095
---------------------
Total current liabilities 13,771 11,754
Deferred income taxes and tax credits 25,059 27,790
Other non-current liabilities 3,081 2,916
Advances for and contributions in aid
of construction 84,375 83,771
---------------------
$347,785 359,380
=====================
SJW CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
THREE MONTHS ENDED
MARCH 31
1999 1998
----------------
Operating activities:
Net income $ 1,781 1,526
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,563 2,398
Deferred income taxes and credits (2,731) (790)
Changes in operating assets and liabilities:
Accounts receivable and accrued revenue 962 699
Prepaid expenses and other 268 308
Accounts payable and other
current liabilities (1,623) 212
Accrued pump taxes and purchased water (459) (188)
Income and non-income taxes payable 1,652 1,135
Accrued interest (753) (1,013)
Other changes, net 3,364 787
-----------------
Net cash provided by operating activities 5,024 5,074
-----------------
Investing activities:
Additions to utility plant (7,429) (6,908)
Cost to retire utility plant (128) 43
-----------------
Net cash used in investing activities (7,557) (6,865)
-----------------
Financing activities:
Borrowings on line of credit 3,200 -
Dividends paid (1,898) (1,855)
Advances and contributions in aid of
construction 1,092 978
Refunds of advances (223) (191)
Purchase of common stock (7,111) -
----------------
Net cash used in financing activities (4,940) (1,068)
----------------
Net change in cash and equivalents (7,473) (2,859)
----------------
Cash and equivalents, beginning of period 8,066 3,832
Cash and equivalents, end of period $ 593 973
================
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $ 2,517 2,500
SJW CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 1999
NOTE I-GENERAL
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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 1998 Annual
Report on Form 10-K should be read with the accompanying
condensed consolidated financial statements.
Basic earnings per share and comprehensive income per
share are calculated using income available to common
shareholders and comprehensive income, respectively,
divided by the weighted average number of shares
outstanding during the year. SJW Corp. has no dilutive
securities, and accordingly, diluted earnings per share
is not shown.
SJW Corp. and its subsidiaries operate predominantly in
one reportable business segment of providing water
utility service to its customers. Non-utility revenue,
assets, and net income do not have a material effect on
the corporation's financial condition and results of
operation.
NOTE II-IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
----------------------------------------
In March 1998, The American Institute of Certified Public
Accountants issued Statement of Position 98-1 (SOP 98-1)
Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use. SOP 98-1 requires that
certain costs during the design, coding, hardware
installation, and testing be capitalized. Internal and
external costs associated with the preliminary project
stage and the post-implementation/operation stage should
be expensed as incurred. SJW Corp. adopted this
statement on January 1, 1999. The adoption of SOP 98-1
did not have a material impact on SJW Corp.'s results of
operations and financial condition.
In 1998, the AICPA issued SOP 98-5 Reporting on the Costs
of Start-up Activities. SOP 98-5 requires costs of start-
up activities and organization costs to be expensed as
incurred. The SOP applies to start-up activities of
development stage entities as well as established
operating entities. SJW Corp. adopted this statement on
January 1, 1999. The adoption of SOP 98-5 did not have a
material impact on SJW Corp.'s results of operations and
financial condition.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources:
-------------------------------
SJW Corp. and its subsidiaries have available 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 March
31, 1999, SJW Corp. had available an unused short-term
bank line of credit of $16,800,000.
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
in order to comply with environmental regulations. Net
capital expenditures for 1999 are estimated at
$22,200,000. For the five-year period from 1999 to 2003,
San Jose Water Company's net capital expenditures are
estimated to aggregate $120,000,000. Net capital
expenditures represent gross capital expenditures less
advances and contributions in aid of construction.
General:
-------
SJW Corp. is a holding company that was created in 1985
through an agreement of merger with San Jose Water
Company. SJW Corp. has operational and financial
flexibility and can engage in non-utility activities.
San Jose Water Company is a public utility in the
business of providing water service to approximately
971,000 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
Corporation's headquarters and the San Jose Arena.
SJW Corp. also owns 1,099,952 shares of California Water
Service Group.
Results of Operations:
---------------------
Overview
SJW Corp.'s consolidated net income for the first quarter
of 1999 was $1,781,000, an increase of 17% from
$1,526,000 in the first quarter of 1998. The increase in
consolidated net income is due primarily to increased
revenue as a result of increased water consumption.
First quarter 1998 earnings were affected by unusually
heavy rainfall which reduced customer usage.
Operating Revenue
The change in consolidated operating revenue from the
same period in 1998 is due to the following factors:
Three months ended
March 31, 1999 vs. 1998
------------------------
Increase
----------------------------------------------------
Utility:
Consumption $ 786,000 4.1%
New customers 126,000 0.7
New rates 735,000 3.8
Real estate 84,000 0.4
----------------------------------------------------
$ 1,731,000 9.0%
====================================================
Operating Expense
The change in consolidated operating expense, excluding
income taxes, from the same period in 1998 is due to the
following:
Three months ended
March 31, 1999 vs. 1998
------------------------
Increase
----------------------------------------------------
Operation and maintenance $ 867,000 5.5%
Depreciation 165,000 1.1
General taxes 57,000 0.4
----------------------------------------------------
$1,089,000 7.0%
====================================================
The increase in operation and maintenance expense is due
primarily to increased water production costs, resulting
from the increase in customer water consumption.
Income tax expense increased $171,000, or 17%, in
comparison to the first quarter of 1998. The effective
rate for each period is approximately 41%.
Interest expense increased $231,000, or 15%, due to the
issuance of Series E Senior Note in December, 1998.
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. The first quarter is normally the quarter
with the lowest average usage per metered customer and is
not indicative of the results for the calendar year. The
average usage per metered customer in the first quarter
of 1999 increased 6% from the first quarter of 1998.
Water Supply
On April 21, 1999, Santa Clara Valley Water District's
ten storage reservoirs were 87% full with 146,251 acre
feet of water, which is above average for the past 20
years. The rainfall in the winter of 1999 maintained a
slightly above average surface water supply for the
Corporation. Surface water is a less costly source of
water and its availability significantly impacts the
results of operation.
Year 2000 Issues
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 (Y2K). The
company generally uses software packages and hardware
that are Y2K assured. The company has received
confirmation from various software and hardware vendors,
as well as independent testers, that the systems are Y2K
ready.
San Jose Water Company has an IT master plan that
identifies systems that need to be replaced due to age,
or need to be modified to generate operating and customer
service benefits. The systems that are currently
identified as non-assured were scheduled to be upgraded
as part of the IT master plan. The last of these
upgrades will be complete in August, 1999.
Management also contacted critical third party suppliers
regarding their Y2K 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.
The company's wholesale supplier, Santa Clara Valley
Water District (SCVWD), relies on the supply from the
state government's Department of Water Resources (DWR).
As of today, DWR has completed the modification required
to be Y2K assured, and the DWR consultant is currently
conducting tests on the enhancement. Contingency plans
are in place to supply the SCVWD system by gravity from
Anderson Reservoirs.
To date there have been no significant costs associated
solely with Y2K issues. The company does not anticipate
incurring material future costs directly related to the
Y2K, such as modifying software and hiring Y2K solution
providers. No major IT projects have been deferred due
to Y2K issues. The costs of identifying the issues,
evaluating the systems, inquiring about third party
suppliers' Y2K preparedness, and any testing are
currently being expensed. Future Y2K assurance
consulting costs are expected to approximate $10,000 and
will be expensed before September 1999.
San Jose Water Company has Y2K contingency plans covering
accounting, operations, and information systems. These
plans will be modified as additional information becomes
available. In the worst case scenario, if SCVWD is
unable to provide water to the company, power supplies
are interrupted, and the computer system that controls
the water distribution function fails, the company may be
able to use its standby generators to pump limited water
from its wells to the distribution system.
Regulatory Affairs
The Public Utilities Commission of California rendered a
rate decision on July 17, 1996, approving an average
annual rate increase of 1.25% through 1999 for San Jose
Water Company. These rate increases are based on rates
of return on a rate base of 9.25% for the years 1997
through 1999, reflecting a return on common equity of
10.2%. The increase for 1999 is to offset operational
and financial attrition.
On January 1, 1999, San Jose Water Company was approved
for a step rate increase in the amount of $1,404,000 or
1%.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Valley Title Company
--------------------
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.
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.
Management has consistently maintained that any future
award to the plaintiff will be within the stated limit of
the Corporation's insurance coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 1999 Annual Meeting of Shareholders of the
Corporation held on April 22, 1999, nine directors were
re-elected to the Board of Directors, and the appointment
of KPMG LLP as independent auditors for 1999 was ratified
by the following votes:
Name of Director In Favor Against
-------------------------------------------------
Mark L. Cali 2,850,536 23,370
J. Philip DiNapoli 2,852,621 21,285
Drew Gibson 2,819,829 54,077
Ronald R. James 2,848,794 25,112
George Moss 2,852,539 21,367
Roscoe Moss, Jr. 2,852,339 21,567
W. Richard Roth 2,852,493 21,413
Charles J. Toeniskoetter 2,851,273 22,633
J.W. Weinhardt 2,853,039 20,867
Ratification of appointment of independent auditors for
1999:
In Favor Against Abstaining
----------------------------------------------------
2,825,429 12,528 35,949
At the same annual meeting, a shareholder proposal which
requested that SJW Corp. not give any money or anything
of value to Silicon Valley/Metropolitan San Jose Chamber
of Commerce was rejected.
In Favor Against Abstaining Non-votes
----------------------------------------------------
127,016 2,147,771 128,673 470,446
ITEM 5. OTHER INFORMATION
On October 22, 1998, the Board of Directors approved a
stock repurchase program whereby SJW Corp. can repurchase
up to 250,000 shares of its outstanding shares. As of
March 31, 1999, the Corporation has repurchased 125,200
shares at the prevailing market price at an aggregate
cost of $7,271,000 of which $7,111,000 was repurchased
during the first quarter of 1999. All repurchased shares
have been cancelled and are considered authorized and non-
issued.
On April 22, 1999, the Board of Directors declared the
regular quarterly dividend of $.60 per common share. The
dividend will be paid June 1, 1999, to shareholders of
record as of the close of business on May 3, 1999.
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 March 31, 1999.
(b.) Reports on Form 8-K
No reports on Form 8-K have been filed during the
quarter ended March 31, 1999.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Corporation has no derivative financial instruments,
financial instruments with significant off-balance sheet
risks, or financial instruments with concentrations of
credit risk. There is no material sensitivity to change
in market rates and prices.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SJW Corp.
Date: May 13, 1999 By /s/
-----------------------------
- -
ANGELA YIP
Vice President of Finance
Chief Financial Officer & Treasurer
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