-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WUCAfveevAV7KooELxnGl5nheg6e3acFZ512Bd+x/lHgoY6bHLSqHreMvgKeS4GI lNKPGYuoJvPuUR/Aaf67Jw== 0000950005-03-000317.txt : 20030307 0000950005-03-000317.hdr.sgml : 20030307 20030307172107 ACCESSION NUMBER: 0000950005-03-000317 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030307 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SJW CORP CENTRAL INDEX KEY: 0000766829 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 770066628 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08966 FILM NUMBER: 03596899 BUSINESS ADDRESS: STREET 1: 374 W SANTA CLARA ST CITY: SAN JOSE STATE: CA ZIP: 95196 BUSINESS PHONE: 4082797800 10-K 1 p16744_10k.txt ANNUAL REPORT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 or [_] 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 408-279-7800 Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on 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, (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 [_] 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. [X] Indicate by check mark whether registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [_] The aggregate market value of the common stock held by non-affiliates of the registrant on June 28, 2002 was $165,232,386. Shares of common stock outstanding on March 7, 2003 -- 3,045,147. Documents Incorporated by Reference Portions of the Registrant's Proxy Statement relating to the Registrant's 2003 Annual Meeting of Shareholders, to be held on April 29, 2003, are incorporated by reference into Part III of this Form 10-K where indicated. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT INDEX The Exhibit Index to this Form 10-K is located in Part IV, Item 15 of this document. TABLE OF CONTENTS
Page ----- PART I Forward-Looking Statements ............................................................... 2 Item 1. Business ........................................................................ 2 a. General Development of Business ................................................. 2 b. Financial Information About Industry Segments ................................... 3 c. Narrative Description of Business ............................................... 4 General ......................................................................... 4 Water Supply .................................................................... 4 Franchises ...................................................................... 5 Seasonal Factors ................................................................ 5 Competition and Condemnation .................................................... 5 Environmental Matters ........................................................... 6 Employees ....................................................................... 6 d. Financial Information About Foreign and Domestic Operations and Export Sales .... 8 Item 2. Properties ...................................................................... 8 Item 3. Legal Proceedings ............................................................... 8 Item 4. Submission of Matters to a Vote of Security Holders ............................. 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ........... 9 a. Market Information .............................................................. 9 b. Holders ......................................................................... 9 c. Dividends ....................................................................... 9 Item 6. Selected Financial Data ......................................................... 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ...................................................................... 11 Item 7a. Quantitative and Qualitative Disclosures About Market Risk ...................... 22 Item 8. Financial Statements and Supplementary Data ..................................... 23 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial 38 Disclosure PART III Item 10. Directors and Executive Officers of the Registrant .............................. 38 Item 11. Executive Compensation .......................................................... 38 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ............................................................. 38 Item 13. Certain Relationships and Related Transactions .................................. 38 PART IV Item 14. Controls and Procedures ......................................................... 39 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................ 39 Exhibit Index ............................................................................ 40 Signatures ............................................................................... 42 Certifications ........................................................................... 44
1 PART I Forward-Looking Statements This report contains forward-looking statements within the meaning of the federal securities laws relating to future events and future results of SJW Corp. and its subsidiaries that are based on current expectations, estimates, forecasts, and projections about the industries in which SJW Corp. operates and the beliefs and assumptions of the management of SJW Corp. Such forward-looking statements are identified by words including "expect", "estimate", "anticipate" and similar expressions. These forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Important factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report under the section entitled "Factors That May Affect Future Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere, and in other reports SJW Corp. files with the Securities and Exchange Commission ("SEC"), specifically the most recent reports on Form 10-Q and Form 8-K, each as it may be amended from time to time. SJW Corp. undertakes no obligation to update the information contained in this report, including the forward-looking statements to reflect any event or circumstance that may arise after the date of this report. Item 1. Business (a) General Development of Business SJW Corp. was incorporated in California on February 8, 1985. SJW Corp. is a holding company with three subsidiaries. San Jose Water Company, a wholly owned subsidiary, with headquarters at 374 West Santa Clara Street, San Jose, California 95196, was originally incorporated under the laws of the State of California in 1866. The company was later reorganized and reincorporated as the San Jose Water Works. San Jose Water Works was reincorporated in 1985 as San Jose Water Company, with SJW Corp. as the parent holding company. San Jose Water Company is a public utility in the business of providing water service to a population of approximately one million people 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, a wholly owned subsidiary, was incorporated in 1985. SJW Land Company owns and operates parking facilities which are located adjacent to San Jose Water Company's headquarters and the HP Pavilion in San Jose, California. SJW Land Company also owns commercial buildings and other undeveloped land in the San Jose Metropolitan area, and a 70% limited partnership interest in 444 West Santa Clara Street, L.P. Crystal Choice Water Service LLC, a 75% majority-owned limited liability subsidiary formed in January 2001, engages in the sale and rental of water conditioning and purification equipment. SJW Corp. also owns 1,099,952 shares of California Water Service Group. Regulation and Rates San Jose Water Company's rates, service and other matters affecting its business are subject to regulation by the California Public Utilities Commission (CPUC). Ordinarily, there are two types of rate increases, general and offset. General rate case decisions usually authorize an initial rate 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. The purpose of the offset rate increase is to compensate utilities for increases in specific expenses, such as those for purchased water, pump tax or purchased power. 2 Pursuant to Section 792.5 of the California Public Utilities Code, a balancing account must be maintained for each expense item for which revenue offsets have been authorized (e.g., purchased water, purchased power and pump tax). The purpose of a balancing account is to track the under-collection or over-collection associated with expense changes and the revenue authorized by the CPUC to offset those expense changes. At December 31, 2002, the balancing account had a net under-collected balance of $262,000. On September 30, 2002, Governor Davis signed the California Assembly Bill 2838 into law. The bill allows for the implementation of interim water rates in general rate cases when the CPUC fails to establish new rates in accordance with the established rate case schedule. The interim rates would be based on a water company's existing rates increased for the amount of inflation since the last approved rate adjustment. The bill also allows for revenue true-up from the time of the implementation of the interim rates to the time of the CPUC's ultimate decision in the rate case. In principle, this mechanism is designed to eliminate the adverse financial impact on water utilities caused by regulatory delays in general rate cases. The bill was codified as Public Utilities Code Section 455.2 and became effective on January 1, 2003. Please also see the heading "Factors That May Affect Future Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". (b) Financial Information About Industry Segments SJW Corp. is a holding company with three subsidiaries: San Jose Water Company (SJWC), a water utility operation with both regulated and non-regulated business, SJW Land Company (SJW Land), which operates parking facilities and commercial building rentals, and Crystal Choice Water Service (CCWS), a water conditioning and purification equipment sale and rental business. The tables below set forth information relating to SJW Corp.'s operating segments. Included in the amounts set forth, certain assets, revenue and expenses have been allocated. The total assets are net of accumulated depreciation.
Year Ended December 31, 2002 (in thousands) -------------------------------------------------------------- SJW SJW SJWC Land CCWS Corp. Corp. ----------- -------- ------------ --------- ---------- Operating revenue ......... $143,092 1,860 700 -- 145,652 Net income (loss) ......... 13,295 674 (350)* 613 14,232 Total assets .............. 414,381 18,168 780 19,894 453,223
Year Ended December 31, 2001 (in thousands) -------------------------------------------------------------- SJW SJW SJWC Land CCWS Corp. Corp. ----------- -------- ------------ --------- ---------- Operating revenue ......... $134,047 1,752 284 -- 136,083 Net income (loss) ......... 12,721 680 (483)* 1,099 14,017 Total assets .............. 388,750 13,306 707 28,254 431,017
Year Ended December 31, 2000 (in thousands) -------------------------------------------------------------- SJW SJW SJWC Land CCWS Corp. Corp. ----------- -------- ------------ --------- ---------- Operating revenue ......... $121,339 1,818 -- -- 123,157 Net income (loss) ......... 12,837 698 -- (2,870) 10,665 Total assets .............. 348,754 12,959 -- 30,217 391,930
- ------------ * Before income taxes and minority interest. 3 (c) Narrative Description of Business 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. San Jose Water Company also provides nonregulated water related services under agreements with municipalities. These nonregulated services include full water system operations, billings and cash remittances. 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 paid an up-front $6.8 million concession fee to the City which will be amortized over the contract term. The company is responsible for all aspects of system operation including capital improvements. The operating results from the water business fluctuates according to the demand for water, which is often influenced by seasonal conditions, such as summer temperatures or the amount and timing of precipitation in San Jose Water Company's service area. Revenue, production costs and income are affected by the changes in water sales and availability of surface water supply. Overhead costs, such as payroll and benefits, depreciation, interest on long-term debt and property taxes, remain fairly constant despite variations in the amount of water sold. As a result, earnings are highest in the higher use, warm weather summer months and lowest in the cool winter months. Water Supply San Jose Water Company's water supply is obtained from wells, surface run-off and diversion and by purchases from the Santa Clara Valley Water District (SCVWD). Under the terms of a master contract with SCVWD expiring in 2051, purchased water provides approximately 40% to 45% of San Jose Water Company's annual production. 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. The pumps and motors at San Jose Water Company's groundwater production facilities are propelled by electric power. Over the last few years, San Jose Water Company has installed standby power generators at 18 of its strategic water production sites. In addition, the commercial office and operations control centers are equipped with standby generators that allow critical distribution and customer service operations to continue during a power outage. The SCVWD has informed San Jose Water Company that its filter plants, which deliver purchased water to San Jose Water Company, are also equipped with standby generators. In the event of a power outage, San Jose Water Company believes it will be able to prevent an interruption of service to customers for a limited period by pumping water with its standby generators and by using the purchased water from SCVWD. 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 at the request of SCVWD. Groundwater in 2002 remained comparable to the 30-year normal level. On January 23, 2003, the SCVWD's ten reservoirs were 55.3% full with 93,663 acre-feet of water in storage. The rainfall from 4 July 2002 to January 2003 was about average. The water supply outlook for 2003 is encouraging with early projections for delivery of California and Federal contract water to the SCVWD at above average quantities for the season to date. San Jose Water Company believes that its various sources of water supply are sufficient to meet customer demand for the remainder of the year. Rainfall at San Jose Water Company's Lake Elsman was measured at 30.36 inches for the season from July 1 through December 31, 2002, which is above the five-year average. While the water supply outlook for 2003 is good, California faces long-term water supply challenges. San Jose Water Company actively works with SCVWD to meet the challenges by continuing to educate customers on responsible water use practices and to conduct long-range water supply planning. Please also see further discussion at "Factors That May Affect Future Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". 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. 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. Competition and Condemnation San Jose Water Company is a public utility regulated by the CPUC and operates within a service area approved by the CPUC. 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 CPUC 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. In January 2002, SJW Land Company entered into an Agreement for Possession and Use (Agreement) with the Valley Transportation Agency (VTA) whereby SJW Land Company has granted VTA an irrevocable right to possession and use of 1.23 acres of the company's parking lot property for the development of a light rail station. VTA has adopted a resolution authorizing a condemnation proceeding to acquire the land and has deposited $3.7 million in an escrow account as fair market compensation. SJW Land Company waived the right to challenge VTA's possession and use in any subsequent eminent domain proceeding but reserved the right to assert, and has disputed, the fair market value placed on the land. According to the terms of the Agreement, if a settlement is not reached within three months of the execution of the Agreement, VTA can file an eminent domain complaint to acquire title to the parking lot property. As of January 29, 2003, VTA has not filed a complaint and SJW Land Company continues to negotiate in good faith with VTA over the fair market value. This transaction will be booked and is expected to result in an increase to net income, if and when the compensation issue is settled or a final court order is rendered. 5 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. In December 1998, the United States Environmental Protection Agency (EPA) established more stringent surface water treatment performance standards and new drinking water standards for disinfection byproducts. San Jose Water Company is in compliance with both regulations, which became effective January 1, 2002. In January 2001, EPA finalized new regulations revising the primary maximum contaminant level (MCL) for arsenic from 50 parts per billion (ppb) down to 10 ppb. San Jose Water Company has monitored its water supply sources for arsenic and is in compliance with the new regulations, which will become effective in 2006. 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 hazardous materials, point and non-point source discharges, and the warning provisions of the California Safe Drinking Water and Toxic Enforcement Act of 1986. Please also see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". Employees As of December 31, 2002, San Jose Water Company had 301 employees, of whom 77 were executive, administrative or supervisory personnel, and of whom 224 were members of unions. San Jose Water Company reached a three-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 2001 through 2003. Both groups are affiliated with the AFL-CIO. 6 Executive Officers of the Registrant
Name Age Offices and Experience - ------------------------- ----- -------------------------------------------------------------- W.R. Roth ............... 50 SJW Corp. -- President and Chief Executive Officer of the Corporation. Prior to becoming Chief Executive Officer in 1999, he was President from October 1996, Vice President from April 1992 until October 1996 and Chief Financial Officer since October 1996. Mr. Roth has served as a director of SJW Corp., San Jose Water Company and SJW Land Company since 1994. R.J. Balocco ............ 53 San Jose Water Company -- Vice President, Corporate Communications. Prior to becoming Vice President, Corporate Communications in 1995, he was Vice President, Administration from April 1992. Mr. Balocco has been with San Jose Water Company since 1982. G.J. Belhumeur .......... 57 San Jose Water Company -- Vice President, Operations. Prior to becoming Vice President, Operations in 1996, he was Operations and Maintenance Manager. Mr. Belhumeur has been with San Jose Water Company since 1970. D. Drysdale ............. 47 San Jose Water Company -- Vice President, Information Services. Prior to becoming Vice President, Information Services in 1999, he was Director of Information Services from 1998 and Data Processing Manager since 1994. Mr. Drysdale has been with San Jose Water Company since 1992. J. Johansson ............ 57 San Jose Water Company -- Vice President, Human Resources. Prior to becoming Vice President, Human Resources in 1999, he was Director of Human Resources from 1998. Prior to 1998 he was Personnel Manager. Mr. Johansson has been with San Jose Water Company since 1976. R.J. Pardini ............ 57 San Jose Water Company -- Vice President, Chief Engineer. Prior to becoming Vice President, Chief Engineer in 1996, he was Chief Engineer. Mr. Pardini has been with San Jose Water Company since 1987. A. Yip .................. 49 SJW Corp. -- Chief Financial Officer and Treasurer since October 1996, and Vice President, Finance of San Jose Water Company as of January 1999. Prior to Vice President, Finance, Ms. Yip served as Chief Financial Officer and Treasurer from October 1994 until December 1999. Ms. Yip has been with San Jose Water Company since 1986. R.S. Yoo ................ 52 San Jose Water Company -- Vice President, Water Quality. Prior to April 1996, he served as Water Quality Manager. Mr. Yoo has been with San Jose Water Company since 1985. R.A. Loehr .............. 56 SJW Corp. and San Jose Water Company -- Secretary. He has served as Secretary since March 1, 1998 and has been with San Jose Water Company since 1987, and serves as its attorney. V.K. Wong ............... 33 San Jose Water Company -- Controller. He has been with San Jose Water Company since December 16, 2002. He served as the Director of Finance for Golden State Warriors from October 1998 until October 2002 and prior to October 1998, Mr. Wong was a senior auditor for KPMG LLP.
7 (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. SJW Corp. maintains a website with the address http://www.sjwater.com. The information contained on this website is not a part of, or incorporating it by reference into, this report. SJW Corp.'s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports are made available free of charge through SJW Corp.'s website, as soon as reasonably practicable after it electronically files such material with, or furnish such material to, the Securities and Exchange Commission. 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 non-developable 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 practice for a water utility. San Jose Water Company's well pumping stations have a production capacity of approximately 264 million gallons per day and the present capacity for taking purchased water is approximately 174 million gallons per day. The gravity water collection system has a physical delivery capacity of approximately 25 million gallons per day. During 2002, a maximum and average of 216 million gallons and 138 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 seven acres of property adjacent to San Jose Water Company's general office facilities, approximately five undeveloped acres of land and commercial properties in the San Jose metropolitan area. The majority of the land adjacent to San Jose Water Company is used as surface parking facilities and generates approximately 54% of SJW Land Company's revenue. Under a ten-year lease expiring January 1, 2010, San Jose Water Company leased half of the office space of SJW Land Company's 1265 South Bascom Avenue building as its engineering headquarters. Approximately 26% of SJW Land Company's revenue is generated from this commercial building. SJW Land Company also owns a 70% limited partnership interest in 444 West Santa Clara, L.P., a real estate limited partnership that owns and operates an office building. Item 3. Legal Proceedings Please see the heading "Competition and Condemnation" under Item 1, "Business" for potential eminent domain complaint. Item 4. Submission of Matters to a Vote of Security Holders None. 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters (a) Market Information Exchange SJW Corp.'s common stock is traded on the American Stock Exchange under the symbol "SJW". 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 2002 and 2001 fiscal years is contained in the section captioned "Market Price Range of Stock" in the tables set forth in Note 14 of "Notes to Consolidated Financial Statements" in Part II, Item 8. (b) Holders There were 732 record holders of SJW Corp.'s common stock on December 31, 2002. (c) Dividends Quarterly dividends have been paid on SJW Corp.'s and its predecessor's common stock for 237 consecutive quarters and the quarterly rate has been increased during each of the last 35 years. The information required by this item as to the cash dividends paid on common stock in 2002 and 2001 is contained in the section captioned "Dividends per share" in the tables set forth in Note 14 of "Notes to Consolidated Financial Statements" in Part II, Item 8. Future dividends will be determined by the Board of Directors after consideration of various financial, economic and business factors. 9 Item 6. Selected Financial Data FIVE YEAR STATISTICAL REVIEW SJW CORP. AND SUBSIDIARIES
2002 2001 2000 1999 1998 -------------- ------------ ------------ ----------- ----------- Consolidated Results of Operations (in thousands) Operating revenue ...................................... $ 145,652 136,083 123,157 117,001 106,010 Operating expense: Operation ............................................. 89,137 84,156 76,622 69,264 57,454 Maintenance ........................................... 7,866 7,090 6,881 6,638 6,909 Taxes ................................................. 14,078 11,770 11,496 12,713 13,206 Depreciation and amortization ......................... 14,013 13,240 11,847 10,235 9,594 ---------- ------- ------- ------- ------- Total operating expense ............................. 125,094 116,256 106,846 98,850 87,163 ---------- ------- ------- ------- ------- Operating income ....................................... 20,558 19,827 16,311 18,151 18,847 Interest expense, other income and deductions .......... 6,326 5,810 5,646 2,267 2,829 ---------- ------- ------- ------- ------- Net income ............................................. 14,232 14,017 10,665 15,884 16,018 Dividends paid ......................................... 8,405 7,834 7,491 7,379 7,419 ---------- ------- ------- ------- ------- Invested in the business ............................... $ 5,827 6,183 3,174 8,505 8,599 ========== ======= ======= ======= ======= Consolidated Per Share Data Net income ............................................. $ 4.67 4.60 3.50 5.20 5.05 Dividends paid ......................................... $ 2.76 2.57 2.46 2.40 2.34 Shareholders' equity at year-end ....................... $ 50.41 49.05 47.40 47.25 45.19 Consolidated Balance Sheet (in thousands) Utility plant and intangible assets .................... $ 541,919 507,227 462,892 432,262 403,227 Less accumulated depreciation and amortization ......... 161,576 149,721 139,396 129,828 122,809 ---------- -------- -------- -------- -------- Net utility plant ................................... 380,343 357,506 323,496 302,434 280,418 ---------- -------- -------- -------- -------- Nonutility property .................................... 10,487 10,309 9,979 10,133 11,360 Total assets ........................................... 453,223 431,017 391,930 372,427 359,380 Capitalization: Shareholders' equity .................................. 153,499 149,354 144,325 143,894 143,149 Long-term debt ........................................ 110,000 110,000 90,000 90,000 90,000 ---------- -------- -------- -------- -------- Total capitalization ................................ $ 263,499 259,354 234,325 233,894 233,149 ========== ======== ======== ======== ======== Other Statistics -- San Jose Water Company Customers at year-end .................................. 219,400 219,000 218,500 217,200 215,300 Average revenue per customer ........................... $ 652.79 612.78 556.99 534.98 489.40 Investment in utility plant per customer ............... $ 2,470 2,316 2,118 1,990 1,873 Miles of main at year-end .............................. 2,422 2,419 2,419 2,409 2,403 Water production (million gallons) ..................... 52,068 52,122 52,021 51,166 48,140 Maximum daily production (million gallons) ............. 216 199 217 207 218 Population served (estimate) ........................... 989,000 988,000 985,000 979,000 971,000
10 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 three subsidiaries. San Jose Water Company, a wholly owned subsidiary, is a public utility in the business of providing water service to a population of approximately one million people in an area comprising about 138 square miles in the metropolitan San Jose area. SJW Land Company, a wholly owned subsidiary, owns and operates a 750-space surface parking facility adjacent to the company's headquarters and the HP Pavilion. SJW Land also owns commercial buildings and other undeveloped land in the San Jose Metropolitan area, and a 70% limited partnership interest in 444 West Santa Clara Street, L.P. Crystal Choice Water Service LLC, a 75% owned limited liability subsidiary formed in January 2001, engages in the sale and rental of water conditioning and purification equipment. SJW Corp. also owns 1,099,952 shares of California Water Service Group. Critical Accounting Policies: SJW Corp. has identified accounting policies below as the policies critical to the business operations and the understanding of the results of operations. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and revenues and expenses. SJW Corp. bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The impact and any associated risks related to these policies on the company's business operations is discussed throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations" where such policies affect the company's reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 of "Notes to Consolidated Financial Statements". The company's critical accounting policies are as follows: Balancing Account The California Public Utilities Commission (CPUC) establishes a balancing account mechanism within its regulatory regime. A separate balancing account must be maintained for each offset expense item (e.g., purchased water, purchased power and pump tax). The purpose of a balancing account is to track the under-collection or over-collection associated with expense changes and the revenue authorized by the CPUC to offset those expense changes. Since balances are being tracked and have to be approved by the CPUC before they can be incorporated into rates, San Jose Water Company has not recognized the balancing account in its financial statements. Had the balancing account under-collection been recognized in San Jose Water Company's financial statements, San Jose Water Company's earnings would have been increased by the amount of balancing account under-collection. As of December 31, 2002, the balancing account had a net under-collected balance of $262,000. Please also see "Factors That May Affect Future Results". Accrued Unbilled Revenue San Jose Water Company reads the majority of its customers' meters on a bi-monthly basis and records its revenue based on its meter reading results. Revenues from the meter reading date to the end of the accounting period is estimated based on historical usage patterns, production records and the effective tariff rates. The estimate of the unbilled revenue is a management estimate utilizing certain sets of assumptions and conditions which include the number of days between meter reads for each billing cycle, the customers' consumption changes, and the company's experiences in unaccounted-for water. Actual results could differ from those estimates, which would result in operating revenue being adjusted in the period that the revision to the Company's estimates is determined. As of December 31, 2002 and 2001, accrued unbilled revenue was $6,605,000 and $7,000,000, respectively. 11 Recognition of Regulatory Assets and Liabilities Generally accepted accounting principles for water utilities include the recognition of regulatory assets and liabilities as permitted by SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation". In accordance with SFAS No. 71, San Jose Water Company records deferred costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that these costs and credits will be recovered in the ratemaking process in a period different from when the costs and credits were incurred. Accounting for such costs and credits is based on management's judgments that it is probable that these costs will be recoverable in the future revenue of the company through the ratemaking process. The regulatory assets and liabilities recorded by San Jose Water Company primarily relate to the recognition of deferred income taxes for ratemaking versus tax accounting purposes. The disallowance of any asset in future ratemaking purposes, including the deferred regulatory assets, would require San Jose Water Company to immediately recognize the impact of the costs for financial reporting purposes. Income Taxes SJW Corp. estimates its federal and state income taxes as part of the process of preparing the financial statements. The process involves estimating the actual current tax exposure together with assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the balance sheet. In the event that actual results differ from these estimates, the provision for income taxes could be materially impacted. Pension Accounting San Jose Water Company offers a defined benefit plan, Supplemental Executive Retirement Plan and certain post-retirement benefits other than pensions to employees retiring with a minimum level of service. Accounting for pensions and other post-retirement benefits requires an extensive use of assumptions about the discount rate, expected return on plan assets, the rate of future compensation increase received by the employees, mortality, turnover and medical costs. See assumptions and disclosures detailed in Note 11 of "Notes to Consolidated Financial Statements". San Jose Water Company, through its Retirement Plan Administrative Committee managed by the representatives from the unions and management establishes investment guidelines with specification that at least 30% of the investments are in bonds or cash. As of December 31, 2002, the plan assets consist of 30% bonds, 10% cash and 60% equities. Furthermore, equities are to be diversified by industry groups to balance for capital appreciation and income. In addition, all investments are publicly traded. The company uses an expected rate of return on plan assets of 8% in its actuarial computation that is below the company's annualized actual rate of return of 10.5% measured from 1984 through 2002. The distributions of assets are conservative and are less affected by market volatility. Furthermore, foreign assets are not included in the investment profile and thus a risk related to foreign exchange fluctuation is eliminated. The market values of the plan assets are marked to market at the measurement date. The investment trust assets suffered significant unrealized market losses in the last two years. Significant unrealized market losses on pension assets are amortized over 14 years for actuarial expense calculation purposes. Market losses in 2001 increased expense by approximately $700,000 in 2002. The San Jose Water Company utilizes Moody's 'A' and 'Aa' rated bonds in industrial, utility and financial sectors with outstanding amount of $1 million or more in determining the discount rate used in calculating the liabilities at the measurement date. For the year ending December 31, 2002, the composite discount rate used was 6.75%. 12 Results of Operations: SJW Corp.'s consolidated net income for twelve months ending December 31, 2002 was $14,232,000, an increase of $215,000 or 2% from $14,017,000 for the same period in 2001. Consolidated Operating Revenue
2002 2001 2000 ----------- --------- ---------- (in thousands) San Jose Water Company ............... $143,092 134,047 121,339 SJW Land Company ..................... 1,860 1,752 1,818 Crystal Choice Water Service ......... 700 284 -- -------- ------- ------- $145,652 136,083 123,157 ======== ======= =======
Consolidated operating revenue for 2002 increased by $9,569,000 or 7% over 2001 mainly due to two rate increases in the period from January through July 2002. This resulted from San Jose Water Company's latest general rate case application and an offset rate increase for production costs adjustments in July 2002. SJW Land Company's parking revenue increased slightly and is largely due to the level of events and activities at the HP Pavilion which is located adjacent to its parking facility. Crystal Choice Water Service's revenue increased $416,000 or 146% over 2001 due to improved marketing strategy. Consolidated operating revenue for 2001 increased $12,926,000 or 10% over 2000 mainly due to rate increases from San Jose Water Company's general rate case application in April 2001 and an offset rate increase for production costs adjustments in July 2001. The change in consolidated operating revenue was due to the following factors:
2002 vs 2001 2001 vs 2000 Increase/(decrease) Increase/(decrease) --------------------- -------------------- (in thousands) Utility: Consumption changes .................. $ (198) -- $ 1,088 1% New customers increase ............... 89 -- 721 -- Rate increases ....................... 9,154 7% 10,899 9% Parking and rental ................... 108 -- (66) -- Crystal Choice Water Service ......... 416 -- 284 -- ------- -- ------- -- $ 9,569 7% $12,926 10% ======= == ======= ==
Pursuant to a CPUC authorized regulatory adjustment on previously capitalized interest on utility plant under construction, San Jose Water Company refunded $531,000 and $541,000 in 2002 and 2001 respectively, of revenue to customers which was accrued in 2000. The following table represents revenues by customer group of San Jose Water Company: Revenue by Customer Group 2002 2001 2000 -------- ------- ------- (in thousands) Residential and Business .............. $130,784 122,345 111,032 Industrial ............................ 1,060 1,017 1,123 Public Authorities .................... 8,174 7,827 6,861 Other metered and non-metered ......... 3,074 2,858 2,323 -------- ------- ------- $143,092 134,047 121,339 ======== ======= ======= 13 Consolidated Operating Expense Before Income Taxes 2002 2001 2000 -------- ------- ------- (in thousands) San Jose Water Company ............... $112,929 105,767 94,174 SJW Land Company ..................... 797 742 713 Crystal Choice Water Service ......... 1,052 778 -- SJW Corp. ............................ 658 1,578 4,550 -------- ------- ------ $115,436 108,865 99,437 ======== ======= ====== The change in consolidated operating expense, excluding income taxes, was due to the following:
2002 vs 2001 2001 vs 2000 Increase/(decrease) Increase/(decrease) --------------------- ------------------------ (in thousands) Production costs: (Increased)/decreased surface water supply . $ (250) -- $ 2,111 2% Usage and new customers .................... (382) -- 1,028 1% Pump tax and purchased water price increase 1,910 1% 3,796 4% Energy price increase ...................... 344 -- 3,456 3% ------- -- -------- - Total production costs ..................... 1,622 1% 10,391 10% Other operating expense ....................... 3,359 3% (2,857) (3)% Maintenance ................................... 776 1% 209 -- Property taxes and other nonincome taxes ...... 41 -- 292 -- Depreciation and amortization ................. 773 1% 1,393 2% ------- -- -------- ---- $ 6,571 6% $ 9,428 9% ======= == ======== ====
The increase in production costs was primarily due to an increase in Santa Clara Valley Water District (SCVWD) water production rates (pump tax and purchased water) in July 2002, and energy cost increases. Water production, however, was similar to 2001, and was consistent with the changes in customer consumption. Additional energy costs were also incurred due to the scheduled maintenance of a SCVWD treatment plant, altering the company's distribution mix and optimal pumping pattern for 2002. San Jose Water Company's water supply is obtained from wells, surface run-off and diversion and by purchases from the SCVWD. Surface water supply is the least expensive source of water and the availability of a slightly higher surface water supply reduced water production costs in 2002. During the year, San Jose Water Company purchased more imported water than pumped water, which became more expensive as a result of an increase in energy costs. Consolidated operating expense in 2002, excluding income taxes and production costs, increased $4,949,000 compared to 2001. The increases included $1,273,000 in pension costs primarily as a result of the decline in the market value of retirement trust assets, $1,308,000 in salaries and wages in accordance with bargaining unit wage escalation and new hires, $598,000 in additional professional fees and $723,000 in insurance costs. Depreciation increased $773,000 due to higher investment in utility plants. Consolidated operating expense in 2001, excluding income taxes, increased $9,428,000, or 9%, in comparison with 2000 due primarily to reduced surface water supply, the SCVWD production cost (pump tax and purchased water) price increases in July 2001, and the energy provider's power cost increases. Power cost increased 90% in 2001 over 2000 due primarily to the energy provider's price increases in January and March of 2001. San Jose Water Company received a corresponding rate increase associated with the water production and energy cost increases effective in July 2001. Additional energy costs were also incurred due to the scheduled maintenance of a SCVWD treatment plant which altered the company's distribution mix and optimal pumping pattern. Increases in operation and maintenance expenses for the year ended 2001 were more than offset by the reduction in the merger-related costs 14 incurred in the year ended 2000 and the regulatory adjustment authorized by the CPUC. The merger-related costs were incurred in conjunction with the proposed merger of SJW Corp. with American Water Works Company, Inc. The proposed merger was terminated on March 1, 2001. Depreciation expense increased due to additions to the utility assets. Sources of Supply 2002 2001 2000 -------- -------- --------- (million gallons) Purchased water ......... 30,566 27,833 27,494 Ground water ............ 18,430 21,368 19,788 Surface water ........... 2,661 2,515 4,381 Reclaimed water ......... 411 406 358 ------ ------ ------ 52,068 52,122 52,021 ====== ====== ====== Water production in 2002 decreased 54 million gallons from 2001. During 2002, San Jose Water Company purchased more imported water to substitute for pumped water which became more expensive as a result of an increase in energy costs. Water production in 2001 increased 101 million gallons over 2000. The changes are consistent with the related operating expenses. Income Tax Expense: Income tax expense increased $2,267,000, or 31%, in comparison to 2001 due to tax benefits associated with certain merger related expenses in 2001. The effective consolidated income tax rates for 2002, 2001 and 2000 were 40%, 35% and 41%, respectively. The 2001 effective tax rate was below the rates for the prior years due to tax benefits associated with certain merger-related expenses. Refer to Note 5 of "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: Interest expense increased $1,066,000, or 16%, due to issuance of Series F senior notes in September 2001, partially offset by lower short term borrowing in 2002. SJW Corp.'s weighted average cost of long-term debt, including amortization of debt issuance costs, was 7.9% for the years ended December 31, 2002 and 2001, and 8.0% for the year ended December 31, 2000. The 2002 dividend income increased $6,000, over 2001 due to a $.005 per share increase in the California Water Service Group annual dividend. Other comprehensive loss in 2002 was $1,682,000 which included an adjustment of $1,363,000 on the decline in the market value of investment in California Water Service Group, and an increase of $319,000 in minimum pension liability of the pension plans primarily due to the decline in market value of the retirement trust assets. 15 Liquidity and Capital Resources: San Jose Water Company's budgeted capital expenditures for 2003, exclusive of capital expenditures financed by customer contributions and advances, are as follows: Budgeted Capital Expenditures 2003 -------------------- (in thousands) Water treatment ..................... $ 1,585 5% Reservoirs and tanks ................ 3,968 14% Pump stations and equipment ......... 2,732 10% Distribution system ................. 17,297 60% Equipment and other ................. 3,085 11% ------- -- $28,667 100% ======= === The 2003 capital expenditures budget is concentrated in main replacements. Approximately $13,000,000 will be spent to replace San Jose Water Company's aging mains. Starting in 1997, San Jose Water Company began a four-phased Infrastructure Study establishing a systematic approach to replace its utility facilities. Phase IV was completed in July of 2002. Phase I and II of the Infrastructure Study analyzed the company's pipes and mains. Phase III and IV examined all other utility facilities. The Infrastructure Study will be used as a guide for future capital improvement programs, and serve as the master plan for the company's replacement program for the next 20 years. 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. San Jose Water Company expects to incur approximately $155,000,000, exclusive of customer contributions and advances, in capital expenditures over the next five years. The company's actual capital expenditures may vary from its projections due to changes in the expected demand for services, weather patterns, and 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. A substantial portion of San Jose Water Company's distribution system was constructed during the period from 1945 to 1980. 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. In most cases, replacement cost will significantly exceed the original installation cost of the retired assets due to increases in the costs of goods and services. In 2002, SJW Corp. invested $287,000 in Crystal Choice Water Service LLC related to its 75% share of capital investment. The capital is invested primarily in rental equipment used by Crystal Choice Water Service LLC in its rental operation. The water utility business is highly seasonal in nature. Customer consumption demand during summer months could significantly exceed that of winter months. Operating revenue, accounts receivable and unbilled revenue increase as customer consumption increases. Historically, San Jose Water Company's write-offs for uncollectible accounts represent less than 1% of its total revenue. Management believes it can continue to collect its accounts receivable balances at its historical collection rate. 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. San Jose Water Company has outstanding $110,000,000 of unsecured senior notes as of December 31, 2002. The senior note agreements of San Jose Water Company generally have terms and conditions that restrict the company from issuing additional funded debt if (1) the funded debt would exceed 66 2/3% of 16 total capitalization, and (2) net income available for interest charges for the trailing twelve calendar month period would be less than 175% of interest charges. As of December 31, 2002, San Jose Water Company's funded debt was 41.8% of total capitalization and the net income available for interest charges was 444% of interest charges. 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 2002, the Department of Water Resources approved San Jose Water Company's application for an approximately $2,500,000 Safe Drinking Water State Revolving Fund twenty-year loan at an interest rate of approximately 2.39%. Funds in the above amount will be received for the retrofit of San Jose Water Company's water treatment plant. San Jose Water Company will request the funding in 2003 as soon as all the loan documentation and contract requirements are met. SJW Corp. and its subsidiaries have unsecured lines of credit available allowing aggregate short-term borrowings of up to $30,000,000 at rates that approximate the bank's prime or reference rate. At December 31, 2002, SJW Corp. and its subsidiaries had available unused short-term bank lines of credit of $18,550,000. Cost of borrowing averaged 3.10% for the twelve months of 2002. The line of credit expires on August 1, 2003. SJW Corp.'s contractual obligation and combined commitments as of December 31, 2002 are as follows:
Contractual Obligations (dollars in thousands) Due in ---------------------------------------------- Less than 1-5 After Total 1 year Years 5 Years ----------- ----------- ------- -------- Long-Term Debt ............................. $110,000 -- -- 110,000 -------- -- -- ------- Total Contractual Cash Obligations ......... $110,000 -- -- 110,000 ======== == == =======
Other Commercial Commitments (dollars in thousands) Due in -------------------------------------------------- Total Amounts Less than 1-3 Over Committed 1 year Years 3 Years --------------- ----------- ------- -------- Line of Credit ....................... $30,000 30,000 -- -- ------- ------ -- -- Total Commercial Commitments ......... $30,000 30,000 -- -- ======= ====== == ==
In addition, San Jose Water Company purchases water from 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. Based on current prices and estimated deliveries, San Jose Water Company expects to purchase a minimum of 90% of the delivery schedule, or 19,300 million gallons ($24,900,000) of water, from SCVWD in the contract year ending June 30, 2003. Off Balance Sheet Arrangement: SJW Corp.'s financial statements include the accounts of SJW Corp. and its wholly owned and majority-owned subsidiaries. SJW Land Company has a 70% limited partnership interest in a real estate investment partnership, 444 West Santa Clara Street, L.P. The limited partnership obtained a mortgage loan in the amount of $4,500,000 in 2001. The mortgage loan is non-recourse to SJW Land Company. Related Party Transactions: SJW Land Company has a 70% limited partnership interest in a real estate limited partnership, 444 West Santa Clara Street, L.P. A real estate development firm, which is partially owned by an individual who also serves as a director of SJW Corp., owns the remaining 30% partnership interest. A commercial 17 building is constructed on the partnership property and is leased to an international real estate firm under a twelve-year long-term lease. The partnership is being accounted for under the equity method of accounting. Factors That May Affect Future Results: The business of SJW Corp. and its subsidiaries may be adversely affected by new and changing legislation, policies and regulations. New legislation and changes in existing legislation by federal, state and local governments and administrative agencies can affect the operations of SJW Corp. and its subsidiaries. San Jose Water Company is regulated by the California Public Utilities Commission (CPUC). Almost all the operating revenue of San Jose Water Company results from the sale of water at rates authorized by the CPUC. The CPUC sets rates that are intended to provide revenues sufficient to recover operating expenses and produce a reasonable return on common equity. San Jose Water Company files and processes general rate applications with the CPUC on a periodic basis. The most recent rate decision relating to San Jose Water Company, approved in April 2001, authorized a return on common equity in 2001, 2002 and 2003 of 9.95%. We believe this is within the range of recent rates of return authorized by the CPUC for water utilities. Pursuant to this rate decision, San Jose Water Company received a 3% rate increase effective January 1, 2003. San Jose Water Company will file a rate application in 2003 for rates scheduled to become effective in 2004, 2005 and 2006. Although the company believes that the rates currently in effect provide it with a reasonable rate of return, there is no guarantee such rates will be sufficient to provide a reasonable rate of return in the future. There is no guarantee that the company's future rate filings will be able to obtain a satisfactory rate of return in a timely manner. In addition, San Jose Water Company relies on policies and regulations promulgated by the CPUC in order to, for example, recover capital expenditures, maintain favorable treatment on gains from the sale of real property, offset its production and operating costs, recover the cost of debt, maintain an optimal equity structure without over-leveraging, and have financial and operational flexibility to engage in non-regulated operations. If the CPUC implements policies and regulations that do not allow San Jose Water Company to accomplish some or all of the items listed above, San Jose Water Company's operating results may be adversely affected. Pursuant to Section 792.5 of the California Public Utilities Code, a balancing account must be kept for each expense item for which revenue offsets have been authorized (i.e., purchased water, purchased power and pump tax). The purpose of a balancing account is to track the under-collection or over-collection associated with expense changes and the revenue authorized by the CPUC to offset those expense changes. On November 29, 2001, the CPUC issued Resolution W-4294 (Resolution) implementing significant changes in the long-established offset rate increase and balancing account recovery procedures applicable to water utilities. These changes could have a significant impact on the risk profile of the water industry. As required by the Resolution, in December 2001, the Commission opened an Order Instituting Rulemaking (OIR) to evaluate existing balancing account and offset rate practices and policies. On December 17, 2002, the CPUC issued an interim OIR decision addressing the procedures for recovery of balancing accounts existing prior to November 29, 2001. Pursuant to the decision, utilities may recover the balancing account balances accrued prior to November 29, 2001 if the utility is not over-earning as measured on a pro-forma basis. The utilities are required to file a request for such recovery before March 17, 2003. At this time, it is unclear whether San Jose Water Company's ability to recover all of the balancing account balance of $373,000 accrued prior to November 29, 2001 will be impacted. Furthermore, it is uncertain how any future CPUC regulation dealing with balancing account balances accrued after November 29, 2001 will affect San Jose Water Company's ability to collect this balance or to receive future offset rate relief. For the period from November 29, 2001 to December 31, 2002, the balancing account accumulated an over-collection of $111,000 to be refunded to the customers. 18 Changes in water supply, water supply costs or the mix of water supply could adversely affect the operating results and business of San Jose Water Company. San Jose Water Company's supply of water primarily relies upon three main sources: water purchased from the Santa Clara Valley Water District (SCVWD), surface water from its Santa Cruz Mountain Watershed, and pumped underground water. Changes and variations in quantities from each of these three sources affects the overall mix of the water supply, therefore affecting the cost of water supply. Surface water is the least costly source of water. If there is an adverse change to the mix of water supply and San Jose Water Company is not allowed to recover the additional or increased water supply costs, its operating results may be adversely affected. The SCVWD receives an allotment of water from state and federal water projects. If San Jose Water Company has difficulties obtaining a high quality water supply from the SCVWD due to availability and legal restrictions, it may not be able to satisfy customer demand in its service area and its operating results and business may be adversely affected. Additionally, the availability of water from San Jose Water Company's Santa Cruz Mountain Watershed depends on the weather and fluctuates with each season. In a normal year, surface water supply provides 6-8% of the total water supply of the system. In a dry season with little rainfall, water supply from surface water sources may be low, thereby causing San Jose Water Company to increase the amount of water purchased from outside sources at a higher cost than surface water and thus increasing water production costs. In addition, San Jose Water Company's ability to use surface water is subject to regulations regarding water quality and volume limitations. If new regulations are imposed or existing regulations are changed or given new interpretations, the availability of surface water may be materially reduced. A reduction in surface water could result in the need to procure more costly water from other sources, thereby increasing the water production costs and adversely affecting the operating results of San Jose Water Company. Because the extraction of water from the groundwater basin and the operation of the water distribution system requires a significant amount of energy, increases in energy prices could increase operating expenses of San Jose Water Company. San Jose Water Company continues to utilize Pacific Gas & Electric's time of use rate schedules to minimize its overall energy costs primarily for groundwater pumping. During the winter months, typically 90% or more of the groundwater is produced during off-peak hours when electrical energy is the cheapest. Optimization and energy management efficiency is achieved through the implementation of Supervisory Control And Data Acquisition (SCADA) software applications that control pumps run based on demand and cost of energy. In the aftermath of the attempt to deregulate the California energy market, energy costs still remain in flux, with resulting uncertainty in the Company's ability to contain energy costs into the future. Fluctuations in customer demand for water due to seasonality, restrictions of use, weather and lifestyle can adversely affect operating results. San Jose Water Company operations are seasonal. Thus, results of operations for one quarter do not indicate results to be expected in next quarter. Rainfall and other weather conditions also affect the operations of San Jose Water Company. Most water consumption occurs during the third quarter of each year when weather tends to be warm and dry. In drought seasons, if customers are encouraged and required to conserve water due to a shortage of water supply or restriction of use, revenue tends to be lower. Similarly, in unusually wet seasons, water supply tends to be higher and customer demand tends to be lower, again resulting in lower revenues. Furthermore, certain lifestyle choices made by customers can affect demand for water. For example, a significant portion of residential water use is for outside irrigation of lawns and landscaping. If there is a decreased desire by customers to maintain landscaping for their homes, residential water demand could decrease, which may result in lower revenues. A contamination event or other decline in source water quality could affect the water supply of San Jose Water Company and therefore adversely affect the business and operating results. San Jose Water Company is subject to certain water quality risks relating to environmental regulations. Through water quality compliance programs, San Jose Water Company continually monitors 19 for contamination and pollution of its sources of water. In the event of a contamination, San Jose Water Company will likely have to procure water from more costly sources and increase future capital expenditures. Although the costs would likely be recovered in the form of higher rates, there can be no assurance that CPUC would approve a rate increase to recover the costs. San Jose Water Company is subject to litigation risks concerning water quality and contamination. Although San Jose Water Company has not been and is not a party to any environmental and product-related lawsuits, it believes such lawsuits against other water utilities have increased in frequency in recent years. If San Jose Water Company is subject to an environmental or product-related lawsuit, it might incur significant legal costs and it is uncertain whether it would be able to recover the legal costs from ratepayers or other third parties. In addition, if current California law regarding CPUC's preemptive jurisdiction over regulated public utilities for claims about compliance with Department of Health Services (DHS) and Environmental Protection Agency (EPA) water quality standards changes, the legal exposure of San Jose Water Company may be significantly increased. Changes of or more stringent environmental regulations could increase San Jose Water Company's operating costs and affect its business. San Jose Water Company's operations are subject to water quality and pollution control regulations issued by the EPA, the DHS and the California Regional Water Quality Control Board. It is also subject to environmental laws and regulations administered by other state and local regulatory agencies. Stringent environmental and water quality regulations could increase San Jose Water Company's water quality compliance costs, hamper San Jose Water Company's available water supplies, and increase future capital expenditure. 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 standards, including maximum contaminant levels (MCLs) for drinking water. San Jose Water Company is currently in compliance with all of the 87 primary MCLs promulgated to date. There can be no assurance that San Jose Water Company will be able to continue to comply with all water quality requirements. San Jose Water Company has implemented monitoring activities and installed specific water treatment improvements enabling it to comply with existing MCLs and plan for compliance with future drinking water regulations. However, the EPA and DHS have continuing authority to issue additional regulations under the SDWA. It is possible that new or more stringent environmental standards could be imposed that will raise San Jose Water Company's operating costs. Future drinking water regulations may require increased monitoring, additional treatment of underground water supplies, fluoridation of all supplies, more stringent performance standards for treatment plants and procedures to further reduce levels of disinfection byproducts. San Jose Water Company continues to seek to establish mechanisms for recovery of government-mandated environmental compliance costs. There are currently 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. Costs associated with security precautions may have an adverse effect on the operating results of San Jose Water Company. Water utility companies have generally been on a heightened state of alert since the threats to the nation's health and security in the fall of 2001. San Jose Water Company has taken steps to increase security at its water utility facilities and continues to implement a comprehensive security upgrade program for production and storage facilities, pump stations and company buildings. San Jose Water Company also coordinates security and planning information with SCVWD, other Bay Area water utilities and various governmental and law enforcement agencies. San Jose Water Company is in the final stage of completing a system-wide vulnerability assessment in compliance with federal regulations imposed on all water utilities. This assessment is required 20 to be completed by March 31, 2003. San Jose Water Company has also actively participated in the security vulnerability assessment training offered by the American Water Works Association Research Foundation and the EPA. San Jose Water Company has and will continue to bear costs associated with additional security precautions to protect its water utility business and other operations. While some of these costs are likely to be recovered in the form of higher rates, there can be no assurance that the CPUC will approve a rate increase to recover such costs, and as a result, the Company's operating results and business may be adversely affected. Other factors that could adversely affect the operating results of SJW Corp. and its subsidiaries include the following: * 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 SJW Corp. * The City of Cupertino's lease operation could be adversely affected by capital requirements, the ability of San Jose Water Company to raise rates through the Cupertino City Council, and the level of operating and maintenance expenses. * The wide acceptance of recycled water as substitute to potable water and the ability of San Jose Water Company to retain its legal right to serve its customers recycled water would impact its sales, revenue and operating results. * SJW Land Company's expenses and operating results also could be adversely affected by the parking lot activities, the HP Pavilion at San Jose events, ongoing local, state and federal land use development activities and regulations, future economic conditions, and the development and fluctuations in the sale of the undeveloped properties. Other trends and development * Pension accruals increased $1,273,000 in 2002 primarily due to the decline in valuation of the retirement plan portfolio. Market conditions, not changes in operating risk or loss experience, was the sole reason for the average liability insurance cost increase of 30% in 2002 after adjustments in self-insured retentions. Medical, liability and pension expenses are expected to continue to have similar increases in 2003. Nonregulated Operations On October 8, 2002, SJW Land Company, a wholly owned subsidiary of SJW Corp., entered into an agreement with the Santa Clara Valley Water District (SCVWD) whereby SJW Land Company will sell to the SCVWD the San Tomas station, a nonutility property, at a contract price of $5,400,000. The transaction is expected to be completed in March 2003. The sale is expected to result in a gain of approximately $3,163, net of income tax expense of $2,198, which is to be included in 2003. The company will reinvest the proceeds in other commercial properties. In January 2002, SJW Land Company entered into an Agreement for Possession and Use (Agreement) with the Valley Transportation Agency (VTA) whereby SJW Land Company granted VTA an irrevocable right to possession and use of 1.23 acres of the company's parking lot property for the development of a light rail station. VTA has adopted a resolution authorizing a condemnation proceeding to acquire the land and has deposited $3.7 million in an escrow account as fair market compensation. SJW Land Company waived the right to challenge VTA's possession and use in any subsequent eminent domain proceeding but reserved the right to assert, and has disputed, the fair market value placed on the land. According to the terms of the Agreement, if a settlement is not reached within three months of the execution of the Agreement, VTA can file an eminent domain complaint to acquire title to the parking lot property. As of January 29, 2003, VTA has not filed a complaint and SJW Land Company continues to negotiate in good faith with VTA over the fair market value. This transaction will be recognized and is expected to result in an increase to net income, if and when the compensation issue is settled or a final court order is rendered. 21 Impact of Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations", which applies to legal obligations that are associated with the retirement of long-lived assets and the associated asset retirement costs. The statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. SJW Corp. does not anticipate that the adoption of SFAS No. 143 will have a material effect on SJW Corp.'s financial condition and results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". Among other provisions, SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt". Accordingly, gains or losses from extinguishment of debt shall not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the criteria of APB No. 30. Gains or losses from extinguishment of debt that do not meet the criteria of APB No. 30 should be reclassified to income from continuing operations in all prior periods presented. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. SJW Corp. does not anticipate that the adoption of SFAS No. 145 will have a material effect on SJW Corp.'s financial condition and results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, a plant closing, or other exit or disposal activities. The provisions of this statement are effective for exit and disposal activities that are initiated by a company after December 31, 2002. SJW Corp. does not anticipate that the adoption of SFAS No. 146 will have a material effect on SJW Corp.'s financial condition and results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure". This statement amends FASB No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions to require prominent disclosures pertaining to the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. SFAS No. 148 is effective for SJW Corp. for December 31, 2002. Since SJW Corp. has not granted any stock options under its plan, the adoption of SFAS No. 148 will not have a material effect on SJW Corp.'s financial condition and results of operations. Item 7a. Quantitative and Qualitative Disclosures About Market Risk SJW Corp. is subject to market risks in the normal course of business, including changes in interest rates and equity prices. The exposure to changes in interest rates is a result of financings through the issuance of fixed-rate, long-term debt. SJW Corp. also owns 1,099,952 shares of California Water Service Group and is exposed to the risk of changes in equity prices. SJW Corp. has no derivative financial instruments, financial instruments with significant off-balance sheet risks, or financial instruments with concentrations of credit risk. There is no material sensitivity to changes in market rates and prices. 22 Item 8. Financial Statements and Supplementary Data Independent Auditors' Report The Shareholders and Board of Directors SJW Corp. We have audited the accompanying consolidated balance sheets of SJW Corp. and subsidiaries (the Company) as of December 31, 2002 and 2001, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial statement schedule. 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 auditing standards generally accepted in the United States of America. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. 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 LLP Mountain View, California January 30, 2003 23 SJW CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ---------------------------- 2002 2001 -------- ------- (in thousands, except share and per share data) ASSETS UTILITY PLANT ............................................................................. $534,079 499,386 INTANGIBLE ASSETS ......................................................................... 7,840 7,841 -------- ------- 541,919 507,227 LESS ACCUMULATED DEPRECIATION AND AMORTIZATION ............................................ 161,576 149,721 -------- ------- 380,343 357,506 -------- ------- NONUTILITY PROPERTY, NET .................................................................. 10,487 10,309 CURRENT ASSETS: Cash and equivalents ..................................................................... 324 5,021 Accounts receivable: Customers ............................................................................... 7,309 6,614 Other ................................................................................... 2,807 484 Accrued utility revenue .................................................................. 6,605 7,000 Materials and supplies, at average cost .................................................. 499 458 Prepaid expenses ......................................................................... 1,155 850 -------- ------- 18,699 20,427 -------- ------- OTHER ASSETS: Investment in California Water Service Group ............................................. 26,014 28,324 Investment in joint venture .............................................................. 1,144 1,199 Unamortized debt issuance and reacquisition costs ........................................ 3,493 3,658 Goodwill ................................................................................. 1,744 1,744 Regulatory assets ........................................................................ 6,013 5,567 Other .................................................................................... 5,286 2,283 -------- ------- 43,694 42,775 -------- ------- $453,223 431,017 ======== ======= CAPITALIZATION AND LIABILITIES CAPITALIZATION: Shareholders' equity: Common stock, $3.125 par value; authorized 6,000,000 shares; issued 3,045,147 shares ............................................................... $ 9,516 9,516 Additional paid-in capital .............................................................. 12,357 12,357 Retained earnings ....................................................................... 128,242 122,415 Accumulated other comprehensive income .................................................. 3,384 5,066 -------- ------- 153,499 149,354 Long-term debt ........................................................................... 110,000 110,000 -------- ------- 263,499 259,354 -------- ------- CURRENT LIABILITIES: Line of credit ........................................................................... 11,450 11,500 Accrued pump taxes and purchased water ................................................... 3,144 3,091 Purchased power .......................................................................... 1,219 1,584 Accounts payable ......................................................................... 381 422 Accrued interest ......................................................................... 3,244 3,136 Accrued taxes ............................................................................ 634 1,182 Refunds due to customers ................................................................. -- 531 Other current liabilities ................................................................ 3,528 2,713 -------- ------- 23,600 24,159 -------- ------- DEFERRED INCOME TAXES ..................................................................... 27,670 24,611 UNAMORTIZED INVESTMENT TAX CREDITS ........................................................ 2,034 2,095 ADVANCES FOR CONSTRUCTION ................................................................. 70,597 64,057 CONTRIBUTIONS IN AID OF CONSTRUCTION ...................................................... 56,117 50,462 DEFERRED REVENUE .......................................................................... 1,350 1,387 OTHER NONCURRENT LIABILITIES .............................................................. 8,356 4,892 COMMITMENTS AND CONTINGENCIES ............................................................. -------- ------- $453,223 431,017 ======== =======
See accompanying Notes to Consolidated Financial Statements. 24 SJW CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31, -------------------------------------------- 2002 2001 2000 ------------ ------------- ------------- (in thousands, except share and per share data) OPERATING REVENUE ................................................ $ 145,652 136,083 123,157 OPERATING EXPENSE: Operation: Purchased water ............................................... 38,228 33,500 29,709 Power ......................................................... 6,805 7,814 4,121 Pump taxes .................................................... 18,950 21,047 18,140 Other ......................................................... 25,154 21,795 24,652 Maintenance ..................................................... 7,866 7,090 6,881 Property taxes and other nonincome taxes ........................ 4,420 4,379 4,087 Depreciation and amortization ................................... 14,013 13,240 11,847 Income taxes .................................................... 9,658 7,391 7,409 ---------- ---------- ---------- 125,094 116,256 106,846 ---------- ---------- ---------- OPERATING INCOME ................................................. 20,558 19,827 16,311 OTHER (EXPENSE) INCOME: Interest on long-term debt ...................................... (7,803) (6,737) (6,434) Dividends ....................................................... 1,232 1,226 1,210 Other, net ...................................................... 245 (299) (422) ---------- ---------- ---------- NET INCOME .................................................... $ 14,232 14,017 10,665 ========== ========== ========== OTHER COMPREHENSIVE LOSS: Unrealized loss on investment, net of taxes of $947 in 2002, $564 in 2001, and $1,493 in 2000 ................................... (1,363) (811) (2,150) Minimum pension liability adjustment, net of taxes of $220 in 2002, $236 in 2001, and $407 in 2000 .......................... (319) (343) (593) ---------- ---------- ---------- Other comprehensive loss ...................................... (1,682) (1,154) (2,743) ---------- ---------- ---------- COMPREHENSIVE INCOME ......................................... $ 12,550 12,863 7,922 ========== ========== ========== BASIC EARNINGS PER SHARE ......................................... $ 4.67 4.60 3.50 ========== ========== ========== COMPREHENSIVE INCOME PER SHARE ................................... $ 4.12 4.22 2.60 ========== ========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING .............................. 3,045,147 3,045,147 3,045,147 ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements. 25 SJW CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated Additional Other Total Common Paid-in Retained Comprehensive Shareholders' Stock Capital Earnings Income Equity ---------- ------------ ----------- --------------- -------------- (in thousands) BALANCES, DECEMBER 31, 1999 ............. $ 9,516 12,357 113,058 8,963 143,894 Net income ............................. -- -- 10,665 -- 10,665 Other comprehensive loss Unrealized loss on investment, net of tax effect of $1,493 ......... -- -- -- (2,150) (2,150) Minimum pension liability adjustment, net of tax effect of $407 ........... -- -- -- (593) (593) ------- Comprehensive income ................... -- -- -- -- 7,922 Dividends paid ......................... -- -- (7,491) -- (7,491) ------- ------ ------- ------ ------- BALANCES, DECEMBER 31, 2000 ............. 9,516 12,357 116,232 6,220 144,325 Net income ............................. -- -- 14,017 -- 14,017 Other comprehensive loss Unrealized loss on investment, net of tax effect of $564 ........... -- -- -- (811) (811) Minimum pension liability adjustment, net of tax effect of $236 ........... -- -- -- (343) (343) ------- Comprehensive income ................. -- -- -- -- 12,863 Dividends paid ....................... -- -- (7,834) -- (7,834) ------- ------ ------- ------ ------- BALANCES, DECEMBER 31, 2001 ............. 9,516 12,357 122,415 5,066 149,354 Net income ............................. -- -- 14,232 -- 14,232 Other comprehensive loss Unrealized loss on investment, net of tax effect of $947 ........... -- -- -- (1,363) (1,363) Minimum pension liability adjustment, net of tax effect of $220 ........... -- -- -- (319) (319) ------- Comprehensive income ................... -- -- -- -- 12,550 Dividends paid ......................... -- -- (8,405) -- (8,405) ------- ------ ------- ------ ------- BALANCES, DECEMBER 31, 2002 ............. $ 9,516 12,357 128,242 3,384 153,499 ======= ====== ======= ====== =======
See accompanying Notes to Consolidated Financial Statements. 26 SJW CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, --------------------------------------- 2002 2001 2000 ----------- ----------- ----------- (in thousands) OPERATING ACTIVITIES: Net income ................................................ $ 14,232 14,017 10,665 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................... 14,013 13,240 11,847 Deferred income taxes and credits ....................... 2,998 1,993 (1,538) Changes in operating assets and liabilities: Accounts receivable and accrued utility revenue .............................................. (2,623) (973) (545) Accounts payable, purchased power and other current liabilities ............................ 409 789 680 Accrued employee compensation .......................... -- (3,024) 2,404 Refund due to customers ................................ (531) (541) 1,072 Accrued pump taxes and purchased water ................. 53 (1,538) 1,557 Accrued taxes .......................................... (548) 916 (3,583) Other changes, net ..................................... 1,088 575 1,475 --------- ------ ------ NET CASH PROVIDED BY OPERATING ACTIVITIES .................. 29,091 25,454 24,034 --------- ------ ------ INVESTING ACTIVITIES: Additions to utility plant ................................ (37,119) (47,672) (33,671) Cost to retire utility plant, net of salvage .............. (1,352) (1,302) (678) Additions to nonutility property .......................... (477) (330) (94) --------- ------- ------- NET CASH USED IN INVESTING ACTIVITIES ...................... (38,948) (49,304) (34,443) --------- ------- ------- FINANCING ACTIVITIES: Dividends paid ............................................ (8,405) (7,834) (7,491) Repayment of line of credit ............................... (50,813) (61,075) (11,500) Borrowings from line of credit ............................ 50,763 61,375 19,400 Advances and contributions in aid of construction ......... 15,242 17,246 12,276 Refunds of advances for construction ...................... (1,627) (1,624) (1,617) Proceeds from issuance of long-term debt .................. -- 20,000 -- --------- ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES .................. 5,160 28,088 11,068 --------- ------- ------- NET CHANGE IN CASH AND EQUIVALENTS ......................... (4,697) 4,238 659 CASH AND EQUIVALENTS, BEGINNING OF YEAR .................... 5,021 783 124 --------- ------- ------- CASH AND EQUIVALENTS, END OF YEAR .......................... $ 324 5,021 783 ========= ======= ======= Cash paid during the year for: Interest .................................................. $ 7,782 7,730 7,413 Income taxes .............................................. $ 8,800 4,188 12,838
See accompanying Notes to Consolidated Financial Statements. 27 SJW CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2002, 2001, and 2000 (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 and majority-owned subsidiaries. Intercompany transactions and balances have been eliminated. A subsidiary in which SJW Corp. has a controlling interest is consolidated in the financial statements with the minority interest included as "other" in the Consolidated Statements of Income and Comprehensive Income and in "other noncurrent liabilities" in the Balance Sheet. 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 (CPUC) and conform to generally accepted accounting principles for rate-regulated public utilities. Approximately 91% 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 750-space surface parking facility adjacent to the HP Pavilion, commercial properties in San Jose, a 70% limited partnership interest in 444 West Santa Clara Street, L.P., and several undeveloped real estate parcels in San Jose, California. Crystal Choice Water Service LLC, a 75% majority-owned limited liability subsidiary formed in January 2001, engages in the sale and rental of water conditioning equipment in the metropolitan San Jose area. Use of Estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 2002, 2001, and 2000 was $603, $617, and $532, respectively. Construction in progress was $5,720, $9,303, and $5,921, at December 31, 2002, 2001, and 2000, respectively. Depreciation is computed using the straight-line method over the estimated service lives of the assets, ranging from 5 to 75 years. For the years 2002, 2001, and 2000 the aggregate provisions for depreciation approximated 3.0%, 2.8%, and 2.7%, respectively, of the beginning of the year depreciable plant. 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. In 2000, San Jose Water Company included in its operating expense a regulatory adjustment of $621 of previously capitalized interest on utility plant under construction which was disallowed by the CPUC. The company continually evaluates the recoverability of utility plant by assessing whether the amortization of the balance over the remaining life can be recovered through the expected and undiscounted future cash flows. SJW Corp. adopted Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets". The adoption of SFAS No. 144 did not have a material impact on SJW Corp.'s financial condition and results of operations. 28 SJW CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2002, 2001, and 2000 -- (Continued) (Dollars in thousands, except share data) Intangible Assets Intangible assets consist of concession fees paid to the City of Cupertino of $6,800 for operating the City of Cupertino municipal water system, and other intangibles associated with the operation of San Jose Water Company. All intangible assets are recorded at cost and are amortized using the straight-line method over the legal or estimated economic life of the asset, whichever is shorter, not to exceed 40 years. The company continually evaluates the recoverability of intangible assets by assessing whether the amortization of the balance over the remaining life can be recovered through the expected and undiscounted future cash flows. Nonutility Property Nonutility property is recorded at cost and consists primarily of land, buildings and parking facilities. Depreciation is computed using accelerated depreciation methods over the estimated useful lives of the assets, ranging from 5 to 39 years. Cash and Equivalents 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. Financial Instruments The carrying amount of SJW Corp.'s current assets and liabilities that are considered financial instruments approximates their fair value as of dates presented due to the short maturity of these instruments. Investment in California Water Service Group SJW Corp.'s investment in California Water Service Group is reported at quoted market price, with the unrealized gain or loss reported as other comprehensive income. Comprehensive Income The accumulated balance of other comprehensive income is reported in the equity section of the financial statements and includes the unrealized gain or loss on the California Water Service Group investment, and the net of tax additional minimum pension liability adjustment related to the company sponsored retirement plans. 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 until December 2001, was amortized over the periods estimated to be benefited, not exceeding 40 years. SJW Corp. adopted SFAS No. 142 "Goodwill and Other Intangible Assets". Accordingly, the company no longer amortizes goodwill from business acquisitions. Management periodically evaluates the recoverability of goodwill by assessing whether the amortization of the balance over remaining life can be recovered through expected and undiscounted future cash flows to determine if impairment has occurred. Income Taxes and Regulatory Assets 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. 29 SJW CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2002, 2001, and 2000 -- (Continued) (Dollars in thousands, except share data) 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. The temporary differences are primarily related to the differences between federal and state book and tax depreciation on property placed in service before the adoption by the CPUC of full normalization for rate making purposes. 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 CPUC, 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 2003 are $1,692. Contributions in aid of construction represent funds received from developers that are not refundable under CPUC 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. Revenue and Balancing Account 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. 2002, 2001, and 2000 operating revenue include $3,257, $2,912, and $2,706 respectively, from the operation of the City of Cupertino municipal water system. 2000 revenue also included a provision of $1,072 for a refund due to customers, out of which $531 and $541 were refunded in 2002 and 2001, respectively. The refund reflected a regulatory adjustment on previously capitalized interest on utility plant under construction that was disallowed by the CPUC. The CPUC establishes the balancing account mechanism to track the under-collection and over-collection of CPUC authorized revenue associated with expense changes for purchased water, purchased power and pump tax. Since the balances have to be approved by the CPUC before they can be incorporated into rates, San Jose Water Company does not recognize the balancing account in its revenue until the CPUC authorizes the change in customers' rates. Earnings per Share 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. 30 SJW CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2002, 2001, and 2000 -- (Continued) (Dollars in thousands, except share data) Business Segment Information SJW Corp. and its subsidiaries operate predominantly in one reportable business segment of providing water utility service to its customers. Nonutility revenue, assets and net income do not have a material effect on SJW Corp.'s financial condition and results of operations. Reclassification Certain prior year amounts have been reclassified to conform with the current year's presentation. Note 2. Capitalization SJW Corp. is authorized to issue 6,000,000 shares of $3.125 par value common stock. At December 31, 2002 and 2001, 3,045,147 shares of common stock were deemed issued and outstanding. At December 31, 2002 and 2001, 176,407 shares of $25 par value preferred stock were 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 $30,000. This line of credit bears interest at variable rates and expires on August 1, 2003. The following table represents borrowings under these bank lines of credits:
2002 2001 2000 ------------ ---------- ---------- Maximum short-term borrowing ............ $ 11,500 26,100 11,200 Average amount outstanding .............. 7,219 12,650 5,847 Weighted average interest rate .......... 3.1% 5.3% 7.6% Interest rate at December 31 ............ 3.3% 3.8% 7.4% Balance as of December 31 ............... $ 11,450 11,500 11,200
Note 4. Long-Term Debt Long-term debt as of December 31 was as follows: Description Due Date 2002 2001 - -------------------------------- ---------- ----------- --------- 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 E 6.81% ...................... 2028 15,000 15,000 F 7.20% ...................... 2031 20,000 20,000 --------- ------ Total long-term debt ...... $ 110,000 110,000 ========= ======= Senior notes held by institutional investors are unsecured obligations of San Jose Water Company and require interest-only payments until maturity. To minimize issuance costs, all of the company's debt has historically been privately placed. The fair value of long-term debt as of December 31, 2002 and 2001 was approximately $119,032 and $111,282, respectively, using a discounted cash flow analysis, based on the current rates for similar financial instruments of the same duration. 31 SJW CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2002, 2001, and 2000 -- (Continued) (Dollars in thousands, except share data) Note 5. Income Taxes The following table reconciles income tax expense to the amount computed by applying the federal statutory rate of 35% to income before income taxes:
2002 2001 2000 --------- --------- --------- "Expected" federal income tax ............................. $8,361 7,492 6,326 Increase (decrease) in taxes attributable to: State taxes, net of federal income tax benefit .......... 1,373 1,229 1,039 Dividend received deduction ............................. (302) (300) (296) Merger related expense deduction ........................ -- (937) -- Other items, net ........................................ 226 (93) 340 ------ ----- ----- $9,658 7,391 7,409 ====== ===== ===== The components of income tax expense were: 2002 2001 2000 --------- ------- ----------- Current: Federal ................................................. $4,740 3,946 7,070 State ................................................... 1,986 1,274 2,131 Deferred: Federal ................................................. 2,838 1,795 (1,264) State ................................................... 94 376 (528) ------ ----- ------ $9,658 7,391 7,409 ====== ===== ======
The components of the net deferred tax liability as of December 31 were as follows: 2002 2001 ---------- --------- Deferred tax assets: Advances and contributions ................... $ 14,121 14,228 Unamortized investment tax credit ............ 1,095 1,128 Pensions and postretirement benefits ......... 2,061 1,265 California franchise tax ..................... 524 708 Other ........................................ 567 700 -------- ------ Total deferred tax assets ...................... $ 18,368 18,029 Deferred tax liabilities: Utility plant ................................ $ 33,891 29,701 Investment ................................... 8,411 9,358 Debt reacquisition costs ..................... 1,041 1,091 Other ........................................ 2,695 2,490 -------- ------ Total deferred tax liabilities ................. 46,038 42,640 -------- ------ Net deferred tax liabilities ................... $ 27,670 24,611 ======== ====== 32 SJW CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2002, 2001, and 2000 -- (Continued) (Dollars in thousands, except share data) 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 SJW Corp. will realize the benefits of these deductible differences. Note 6. Intangible Assets and Goodwill Effective January 1, 2002, SJW Corp. adopted the provisions of SFAS No. 142 "Goodwill and Other Intangible Assets" regarding goodwill and intangible assets amortization. Intangible assets consist of concession fees paid to the City of Cupertino of $6,800 for operating the City of Cupertino municipal water system, and other intangibles of $1,040 primarily incurred in conjunction with the Santa Clara Valley Water District (SCVWD) water contracts related to the operation of San Jose Water Company. All intangible assets are recorded at cost and are amortized using the straight-line method over the legal or estimated economic life of the asset, whichever is shorter, not to exceed 40 years. Amortization expense for the intangible assets was $288, $289 and $289 for the years ended December 31, 2002, 2001 and 2000, respectively. Amortization expense for 2003, 2004, 2005, 2006 and 2007 is anticipated to be $288 per year. The costs of intangible assets as of December 31, 2002 and 2001 are as follows: Dollars in thousands 2002 2001 ---------------------------------- --------- --------- Concession fees ................ $6,800 $6,800 Other intangibles .............. 1,040 1,041 ------ ------ Intangible Assets .............. $7,840 $7,841 Less: Accumulated amortization Concession fees ............ 1,428 1,156 Other intangibles .......... 267 251 ------ ------ Net Intangible Assets .......... $6,145 $6,434 ====== ====== The excess cost over fair market value of net assets acquired is recorded as goodwill and until December 2001, was amortized over the periods estimated to be benefited, not exceeding 40 years. Effective January 1, 2002, the company no longer amortizes goodwill from business acquisitions. On a pro-forma basis, if the company had applied SFAS No. 142 during 2001 and 2000, amortization of goodwill would have been as follows:
Dollars in thousands 2002 2001 2000 --------------------------------------------------- ------------ ------------ ------------ Reported net income ............................. $ 14,232 $ 14,017 $ 10,665 Add: Goodwill amortization, net of tax .......... -- 85 85 -------- -------- -------- Adjusted net income ............................. $ 14,232 $ 14,102 $ 10,750 ======== ======== ======== Basic earnings per share, as reported ........... $ 4.67 $ 4.60 $ 3.50 Basic earnings per share, adjusted .............. $ 4.67 $ 4.63 $ 3.53
Note 7. Commitments San Jose Water Company purchases water from 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. Based on current prices and estimated deliveries, San Jose Water Company expects to purchase a minimum of 90% of the delivery schedule, or 19,300 million gallons ($24,900) of water, from SCVWD in the contract year ending June 30, 2003. 33 SJW CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2002, 2001, and 2000 -- (Continued) (Dollars in thousands, except share data) In 1997, San Jose Water Company entered into a 25-year contract agreement with the City of Cupertino to operate the City's municipal water system. Under the terms of the contract agreement, San Jose Water Company assumed responsibility for all maintenance, operating and capital costs, while receiving all payments for water service. Water service rates are subject to approval by the Cupertino City Council. Note 8. Contingency In January 2002, SJW Land Company entered into an Agreement for Possession and Use (Agreement) with the Valley Transportation Agency (VTA) whereby SJW Land Company has granted VTA an irrevocable right to possession and use of 1.23 acres of the company's parking lot property for the development of a light rail station. VTA has adopted a resolution authorizing a condemnation proceeding to acquire the land and has deposited $3.7 million in an escrow account as fair market compensation. SJW Land Company waived the right to challenge VTA's possession and use in any subsequent eminent domain proceeding but reserved the right to assert, and has disputed, the fair market value placed on the land. According to the terms of the Agreement, if a settlement is not reached within three months of the execution of the Agreement, VTA can file an eminent domain complaint to acquire title to the parking lot property. As of December 31, 2002, VTA has not filed a complaint and SJW Land Company continues to negotiate in good faith with VTA over the fair market value. This transaction is expected to result in an increase in net income, if and when the compensation issue is settled or a final court order is rendered. Note 9. Joint Venture In September 1999, SJW Land Company formed 444 West Santa Clara Street, L.P., a limited partnership, with a real estate development firm whereby SJW Land Company contributed real property in exchange for a 70% limited partnership interest. The real estate development firm is partially owned by an individual who also serves as a director of SJW Corp. A commercial building was constructed on the partnership property and is leased to an international real estate firm under a twelve-year long-term lease. The partnership is being accounted for under the equity method of accounting. Included in the Consolidated Statements of Income and Comprehensive Income is SJW Land Company's share of the partnership earnings of $147 in 2002, $165 in 2001 and $96 in 2000. Note 10. Crystal Choice Water Service LLC In January 2001, SJW Corp. formed Crystal Choice Water Service LLC, a limited liability company, with Kinetico, Incorporated, a leading water conditioning equipment manufacturer. Crystal Choice Water Service LLC engages in the sale and rental of water conditioning equipment. SJW Corp. owns approximately 75% of the joint venture and has invested $287 and $850 in 2002 and 2001, respectively. The consolidated financial statements of SJW Corp. at December 31, 2002 and 2001 include the operating results of Crystal Choice Water Service LLC. Inter-company balances were eliminated. Minority interest of $87 and $121 was included in other income in the Consolidated Statements of Income and Comprehensive Income at December 31, 2002 and 2001, respectively. Included in other noncurrent liabilities of SJW Corp.'s Balance Sheet is minority interest of $187 and $162 at December 31, 2002 and 2001, respectively. 34 SJW CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2002, 2001, and 2000 -- (Continued) (Dollars in thousands, except share data) Note 11. 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. Company 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 benefit cost shown below. The plan, which is unfunded, had a projected benefit obligation of $4,583, $5,399, and $9,651 as of December 31, 2002, 2001, and 2000, respectively, and net periodic pension cost of $606, $616, and $1,818, for 2002, 2001, and 2000, respectively. Deferral Plan San Jose Water Company sponsors a salary deferral plan that allows employees to defer and contribute a portion of their earnings to the plan. Contributions, not to exceed set limits, are matched by the company. Company contributions were $671, $639, and $607, in 2002, 2001, and 2000, 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. The plan is a flat dollar plan which is unaffected by variations in health care costs. Net periodic cost for the defined benefit plans and other postretirement benefits was:
Pension Benefits Other Benefits ----------------------------------- ----------------------------- 2002 2001 2000 2002 2001 2000 ------- ------ ------ ----- ---- ---- Weighted-Average Assumptions as of Dec. 31 ......................... % % % % % % Discount rate ..................................... 6.75 7.25 7.75 6.75 7.25 7.75 Expected return on plan assets .................... 8.00 8.00 8.00 8.00 8.00 8.00 Rate of compensation increase ..................... 4.00 4.00 4.00 n.a. n.a. n.a. ------- ------ ------ ----- ---- ---- Components of Net Periodic Benefit Cost Service cost ...................................... $ 1,148 926 950 $ 41 40 38 Interest cost ..................................... 2,640 2,421 2,591 118 118 114 Expected return on assets ......................... (2,659) (2,940) (2,834) (40) (33) (31) Amortization of transition obligation ............. 54 3 3 56 56 56 Amortization of prior service cost ................ 354 258 258 16 16 16 Recognized actuarial (gain) loss .................. 57 (346) 244 -- (6) (13) ------- ------ ------ ----- ---- ---- Net periodic benefit cost ......................... $ 1,594 322 1,212 $ 191 191 180 ======= ====== ====== ===== ==== ====
35 SJW CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2002, 2001, and 2000 -- (Continued) (Dollars in thousands, except share data) The actuarial present value of benefit obligations and the funded status of San Jose Water Company's defined benefit pension and other postretirement plans as of December 31 were as follows:
Pension Benefits Other Benefits ---------------------------------- ------------------------------- 2002 2001 2000 2002 2001 2000 -------- ------- ------- ------- ------ ------ Change in Benefit Obligation Benefit obligation at beginning of year .............. $ 37,021 36,385 26,749 $ 1,709 1,569 1,258 Service cost ......................................... 1,148 926 950 41 40 38 Interest cost ........................................ 2,640 2,421 2,591 118 118 114 Amendments ........................................... 424 1,275 -- -- -- -- Actuarial (gain) loss ................................ 1,931 (2,019) 7,943 66 101 258 Benefits paid ........................................ (1,698) (1,967) (1,848) (113) (119) (99) -------- ------- ------- ------- ------ ------ Benefit obligation at end of year .................... $ 41,466 37,021 36,385 $ 1,821 1,709 1,569 ======== ======= ======= ======= ====== ====== Change in Plan assets Fair value of assets at beginning of year ............ $ 34,010 37,422 36,088 $ 394 483 439 Actual return on plan assets ......................... (4,713) (1,766) 3,016 7 18 22 Employer contributions ............................... 233 321 166 206 -- 101 Benefits paid ........................................ (1,698) (1,967) (1,848) (100) (107) (79) -------- ------- ------- ------- ------ ------ Fair value of assets at end of year .................. $ 27,832 34,010 37,422 $ 507 394 483 ======== ======= ======= ======= ====== ====== Funded Status Plan assets less benefit obligation .................. $(13,633) (3,010) 1,038 $(1,313) (1,315) (1,086) Unrecognized transition obligation ................... 152 206 209 509 565 622 Unamortized prior service cost ....................... 2,270 3,387 2,370 39 54 70 Unrecognized actuarial (gain) loss ................... 9,388 (1,045) (4,078) 20 (94) (235) -------- ------- ------- ------- ------ ------ Accrued benefit cost ................................. $ (1,823) (462) (461) $ (745) (790) (629) ======== ======= ======= ======= ====== ======
Amounts recognized on the balance sheet consist of:
Pension Benefits Other Benefits ---------------------------------- ------------------------------ 2002 2001 2000 2002 2001 2000 ---- ---- ---- ---- ---- ---- Accrued benefit costs ................................... $ (1,823) (462) (461) $ (745) (790) (629) Additional minimum liability ............................ (4,541) (2,580) (1,943) -- -- -- Intangible asset ........................................ 2,423 1,001 943 -- -- -- Accumulated other comprehensive loss .................... 2,118 1,579 1,000 -- -- -- -------- ------ ------ ------ ---- ---- Net amount Recognized ................................... $ (1,823) (462) (461) $ (745) (790) (629) ======== ====== ====== ====== ==== ====
Note 12. Long-Term Incentive Plan During 2002, SJW Corp. adopted the Long-Term Incentive Plan (Incentive Plan) under which 300,000 shares of common stock will initially be reserved for issuance. The Incentive Plan will allow SJW Corp. to provide key employees, including officers, the opportunity to acquire a meaningful equity interest in the corporation as an incentive for them to remain employed by SJW Corp. and its subsidiaries. In no event may any one participant in the Incentive Plan receive awards under the Incentive Plan in any calendar year covering an aggregate of more than 100,000 shares of the common stock. Additionally, awards granted under the Incentive Plan may be conditioned upon the attainment of specified performance goals. The types of awards included in the Incentive Plan are stock options, dividend units, performance shares, rights to acquire restricted stock and stock bonuses. As of December 31, 2002, no award had been granted under the Incentive Plan. 36 SJW CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2002, 2001, and 2000 -- (Continued) (Dollars in thousands, except share data) Note 13. Sale of Nonutility Property On October 8, 2002, SJW Land Company, a wholly owned subsidiary of SJW Corp., entered into an agreement with the Santa Clara Valley Water District whereby SJW Land Company will sell the San Tomas station, a nonutility property, at a contract price of $5,400. The transaction is expected to be completed in March 2003. The sale is expected to result in a gain of approximately $3,163, net of income tax expense of $2,198, which is to be included in 2003. The company will reinvest the proceeds in other commercial properties. Note 14. Unaudited Quarterly Financial Data Summarized quarterly financial data is as follows:
2002 Quarter ended --------------------------------------------------- March June September December ------------ ---------- ----------- --------- Operating revenue ...................... $ 27,718 38,696 46,153 33,085 Operating income ....................... 3,372 5,720 7,397 4,069 Net income ............................. 1,749 3,991 5,776 2,716 Comprehensive income ................... 1,652 3,731 5,990 1,177 Basic earnings per share ............... 0.57 1.31 1.90 0.89 Comprehensive income per share ......... 0.54 1.22 1.97 0.39 Market price range of stock: High ................................ 89.00 88.20 81.40 83.85 Low ................................. 78.25 77.05 77.00 77.80 Dividends per share .................... 0.69 0.69 0.69 0.69
2001 Quarter ended --------------------------------------------------- March June September December ------------ ---------- ----------- --------- Operating revenue ...................... $ 24,245 36,364 44,182 31,292 Operating income ....................... 2,212 5,715 7,947 3,953 Net income ............................. 678 4,170 6,395 2,774 Comprehensive income ................... 1,716 2,255 7,272 1,620 Basic earnings per share ............... 0.22 1.37 2.10 0.91 Comprehensive income per share ......... 0.56 0.74 2.39 0.53 Market price range of stock: High ................................ 106.50 87.00 86.50 91.20 Low ................................. 71.90 79.00 76.50 79.08 Dividends per share .................... 0.615 0.6525 0.6525 0.6525
37 SJW CORP. FINANCIAL STATEMENT SCHEDULE Schedule II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Years Ended December 31, 2002, 2001 and 2000
Description 2002 2001 2000 - ----------- --------- -------- -------- Allowance for doubtful accounts Balance, beginning of period ................................... $ 100,000 100,000 100,000 Charged to expense ............................................. 397,860 214,243 180,480 Accounts written off ........................................... (405,030) (240,096) (215,570) Recoveries of accounts written off ............................. 27,170 25,853 35,090 --------- -------- -------- Balance, end of period ......................................... $ 120,000 100,000 100,000 ========= ======== ======== Reserve for self insurance Balance, beginning of period ................................... $ 579,698 661,247 707,025 Charged to expense ............................................. 90,000 40,000 80,000 Payments ....................................................... (60,406) (121,549) (125,778) --------- -------- -------- Balance, end of period ......................................... $ 609,292 579,698 661,247 ========= ======== ========
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The information required by this item is contained in part under the caption "Executive Officers of Registrant" in Part I of this report, and the remainder is contained in SJW Corp.'s Proxy Statement for its 2003 Annual Meeting of Shareholders to be held on April 29, 2003 (the "2003 Proxy Statement") under the captions "Proposal 1 -- Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance," and is incorporated herein by reference. Item 11. Executive Compensation The information required by this item is contained in the 2003 Proxy Statement under the captions "Compensation of Directors," "Executive Compensation," "Termination of Employment and Change-in-Control Arrangements," and "Compensation Committee Interlocks and Insider Participation" and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is contained in the 2003 Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management" and "Securities Authorized for Issuance under Equity Compensation Plans," and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information required by this item is contained in the 2003 Proxy Statement under the caption "Certain Relationships and Related Transactions," and is incorporated herein by reference. 38 PART IV Item 14. Controls and Procedures (a) Evaluation of disclosure controls and procedures. Based on their evaluation within 90 days of the filing date of this report, SJW Corp.'s Chief Executive Officer and Chief Financial Officer have concluded that SJW Corp.'s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)under the Securities Exchange Act of 1934 ("Exchange Act")) are effective to ensure that information required to be disclosed by SJW Corp. in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) Changes in internal controls. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of SJW Corp.'s Chief Executive Officer and Chief Financial Officer. Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (1) Financial Statements
Page ----- Independent Auditors' Report .................................................... 23 Consolidated Balance Sheets as of December 31, 2002 and 2001 .................... 24 Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2002, 2001 and 2000 ............................................... 25 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000 ............................................... 26 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 ....................................................................... 27 Notes to Consolidated Financial Statements ...................................... 28
(2) Financial Statement Schedule Schedule Number II - --------- Valuation and Qualifying Accounts and Reserves, Years ended December 31, 2002, 2001, and 2000 ......... 38 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 15. 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. 39 EXHIBIT INDEX
Exhibit No. Description - -------- ----------------------------------------------------------------------------------- 2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession: 2.1 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. S.E.C. File No. 1-8966. 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 Exhibit 3.1 to Form 10-K for the year ended December 31, 2001. 4 Instruments Defining the Rights of Security Holders, including Indentures: No current issue of the registrant's long-term debt exceeds 10 percent of its total assets. SJW Corp. 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. 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 Exhibit 10.1 to Form 10-K for the year ended December 31, 2001. Executive Compensation Plans and Arrangements: 10.2 Ninth amendment to San Jose Water Company Retirement Plan as amended. Filed as an Exhibit to Annual Report on Form 10-K for the year ended December 31, 1996. S.E.C. File No. 1-8966. 10.3 San Jose Water Company Executive Supplemental Retirement Plan adopted by San Jose Water Company Board of Directors. (1)(2) 10.4 First Amendment to San Jose Water Company Executive Supplemental Retirement Plan adopted by San Jose Water Company Board of Directors. (1)(2) 10.5 Second 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, 1998. S.E.C. File No. 1-8966. (2) 10.6 Third 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, 1998. S.E.C. File No. 1-8966. (2) 10.7 Fourth 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, 1998. S.E.C. File No. 1-8966. (2)
40
Exhibit No. Description - -------- --------------------------------------------------------------------------------- 10.8 Fifth 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, 1998. S.E.C. File No. 1-8966. (2) 10.9 SJW Corp. Executive Severance Plan adopted by SJW Corp. Board of Directors. Filed as an Exhibit to Annual Report on Form 10-K for the year ended December 31, 1998. S.E.C. File No. 1-8966. (2) 10.10 Sixth Amendment to San Jose Water Company's Executive Supplemental Retirement Plan. Filed as an Exhibit to 10-Q for the period ending September 30, 1999. S.E.C. File No. 1-8966. (2) 10.11 Amendment to SJW Corp.'s Executive Severance Plan. Filed as an Exhibit to 10-Q for the period ending September 30, 1999. S.E.C. File No. 1-8966. (2) 10.12 Resolution for Directors' Retirement Plan adopted by SJW Corp. Board of Directors as amended on September 22, 1999. Filed as an Exhibit to 10-Q for the period ending September 30, 1999. S.E.C. File No. 1-8966. (2) 10.13 Resolution for Directors' Retirement Plan adopted by San Jose Water Company's Board of Directors as amended on September 22, 1999. Filed as an Exhibit to 10-Q for the period ending September 30, 1999. S.E.C. File No. 1-8966. (2) 10.14 Resolution for Directors' Retirement Plan adopted by SJW Land Company Board of Directors on September 22, 1999. Filed as an Exhibit to 10-Q for the period ending September 30, 1999. S.E.C. File No. 1-8966. (2) 10.15 SJW Corp. Long-Term Incentive Plan, adopted by SJW Corp. Board of Directors March 6, 2002. Filed as an Exhibit to Form 10-Q for the period ended June 30, 2002. (2) 10.16 Seventh Amendment to San Jose Water Company's Executive Supplemental Retirement Plan, adopted by San Jose Water Company Board of Directors. Filed as an Exhibit to Form 10-Q for the period ended June 30, 2002. (2) 10.17 Limited Partnership Agreement of 444 West Santa Clara Street, L. P. executed between SJW Land Company and Toeniskoetter & Breeding, Inc. Development. Filed as an Exhibit to 10-Q for the period ending September 30, 1999. S.E.C. File No. 1-8966. 21 Subsidiaries of the Registrant. (1) 99 Additional Exhibits. 99.1 Certification by President and Chief Executive Officer. (1) 99.2 Certification by Chief Financial Officer and Treasurer. (1)
- ------------ (1) Filed concurrently herewith. (2) Management contract or compensatory plan or arrangement. In accordance with the Securities and Exchange Commission's requirements, SJW Corp. will furnish copies of any exhibit upon payment of 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. 41 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, 2003 By /s/ DREW GIBSON ---------------------------------- Drew Gibson, Chairman, 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, 2003 By /s/ W. RICHARD ROTH ---------------------------------- W. Richard Roth, President, Chief Executive Officer and Member, Board of Directors Date: January 29, 2003 By /s/ ANGELA YIP ---------------------------------- Angela Yip, Chief Financial Officer Date: January 29, 2003 By /s/ VICTOR K. WONG ---------------------------------- Victor K. Wong, Controller (Chief Accounting Officer) Date: January 29, 2003 By /s/ MARK L. CALI ---------------------------------- Mark L. Cali, Member, Board of Directors Date: January 29, 2003 By /s/ J. PHILIP DINAPOLI ---------------------------------- J. Philip DiNapoli, Member, Board of Directors Date: January 29, 2003 By /s/ DREW GIBSON ---------------------------------- Drew Gibson, Member, Board of Directors Date: January 29, 2003 By /s/ RONALD R. JAMES ---------------------------------- Ronald R. James, Member, Board of Directors Date: January 29, 2003 By /s/ GEORGE E. MOSS ---------------------------------- George E. Moss, Member, Board of Directors 42 Date: January 29, 2003 By /s/ ROSCOE MOSS, JR. ---------------------------------- Roscoe Moss, Jr., Member, Board of Directors Date: January 29, 2003 By /s/ CHARLES J.TOENISKOETTER ---------------------------------- Charles J. Toeniskoetter, Member, Board of Directors Date: January 29, 2003 By /s/ FREDERICK ULRICH ---------------------------------- Frederick Ulrich, Member, Board of Directors 43 CERTIFICATIONS I, W. Richard Roth, President and Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of SJW Corp. (the "registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 7, 2003 /s/ W. RICHARD ROTH ------------------------------------- W. Richard Roth President and Chief Executive Officer 44 I, Angela Yip, Chief Financial Officer and Treasurer, certify that: 1. I have reviewed this annual report on Form 10-K of SJW Corp. (the "registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 7, 2003 /s/ ANGELA YIP ------------------------------------- Angela Yip Chief Financial Officer and Treasurer 45 EX-10.3 3 p16744_ex10-3.txt SUPPLEMENTAL RETIREMENT PLAN EXHIBIT 10.3 SAN JOSE WATER COMPANY EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN 69 TABLE OF CONTENTS SAN JOSE WATER COMPANY EXECUTIVE SUPPLEMENTAL RETIREMENT ARTICLE I - DEFINITION ARTICLE II - PARTICIPATION ARTICLE III - RETIREMENT BENEFIT ARTICLE IV - VESTING ARTICLE V - FUNDING NATURE OF THE PLAN ARTICLE VI - ADMINISTRATION OF THE PLAN ARTICLE VII - AMENDMENTS AND TERMINATION ARTICLE VIII - MISCELLANEOUS 70 THE SAN JOSE WATER COMPANY EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN On July 22, 1992 the Board of Directors of the San Jose Water Company (the "Company") adopted the San Jose Water Company Executive Supplemental Retirement Plan (the "Plan"). The Plan is designed to supplement the retirement income of a designated select group of management and or highly compensated executives of the San Jose Water Company (the "Company"). The Plan is intended to be a nonqualified, unfunded retirement plan. The purpose of the Plan is to improve the ability of the Company to attract, retain and motivate management individuals. The Plan is hereby adopted in its entirety effective January 1, 1992. 71 ARTICLE I DEFINITIONS Wherever used herein the following terms have the meanings indicated: 1.1 "Actuarially Equivalent" has the meaning set forth in the San Jose Water Company Retirement Plan. 1.2 "Beneficiary" means the person or persons entitled to receive a Participant's retirement benefits as provided in Section 3.4. 1.3 "Benefit Commencement Date" means the date on which benefits commence to be payable under this Plan. In the case of a retired Participant such date shall be the later of: (i) his Early Retirement Date; (ii) his Normal Retirement Date; or (iii) the date of separation from service. 1.4 "Board of Directors" means the Board of Directors of San Jose Water Company. 1.5 "Committee" means the committee established pursuant to Article V hereof, as it shall be constituted from time to time. 1.6 "Company" means San Jose Water Company and any successor to all or a major portion of the assets or business of the San Jose Water Company. 1.7 "Compensation" has the meaning set forth in the San Jose Water Company Retirement Plan. 1.8 "Credited Service" has the meaning set forth in the San Jose Water Company Retirement Plan. 72 1.9 "Early Retirement Date" means the first day of the month coinciding with or next following the date when a Participant has attained the age of fifty-five (55) years and completed twenty (20) years of Credited Service with the Company. 1.10 "Employee" means a person who is employed by the Company. 1.11 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.12 "Eligible Employee" means any officer of the Company or Employee selected by the Committee, unless the Committee determines that such officer or Employee does not fall within ERISA's definition of a select group of management or highly compensated employees. 1.13 "Final Average Compensation" means a Participant's average monthly Compensation during the thirty-six (36) calendar months of the Participant's employment with the Company for which such average Compensation is the highest. 1.14 "Normal Retirement Date" means the first day of the calendar month coinciding with or next following the date when a Participant attains sixty-five (65) years of age. 1.15 "Participant" means an Eligible Employee who has received written notification from the Company that he has been designated as a Participant of the Plan by the Committee following satisfaction of the eligibility requirements described in Section 2.1. 1.16 "Plan" means the San Jose Water Company Executive Supplemental Retirement Plan as set forth in this document and in any amendments from time to time made hereto. 1.17 "Qualified Joint and Survivor Annuity" has the meaning set forth in the San Jose Water Company Retirement Plan. 73 1.18 "Retirement Benefit" means the benefit payable under this Plan, calculated for in accordance with Article IV. 1.19 "San Jose Water Company Retirement Plan" means the San Jose Water Company Retirement Plan, adopted November 1, 1950, as it has been amended and restated from time to time. 1.20 "Single Life Annuity" has the meaning set forth in the San Jose Water Company Retirement Plan. 1.21 "Ten Year Certain and Life Option" has the meaning set forth in Section 3.4. 1.22 "Year of Service" has the meaning set forth in the San Jose Water Company Retirement Plan. 74 ARTICLE II PARTICIPATION 2.1 Each Eligible Employee shall become a Participant on the first day of the month coincident with the day he first becomes an Eligible Employee. 75 ARTICLE III RETIREMENT BENEFIT 3.1 The retirement benefits under this Plan to which a Participant shall be entitled, shall be an amount equal to the difference, if any, between (a) and (b) below: (a) Two percent (2 %) of the Final Average Compensation of a Participant multiplied by the Participant's Years of Service (not to exceed twenty (20) years); (ii) one percent (1%) of the Final Average Compensation multiplied by the Participant's Years of Service in excess of twenty (20) (not to exceed an additional ten (10) years); and (iii) Mr. John Weinhardt shall receive an additional three quarters of one percent (.75%) of Final Average Compensation for each year of service as President and Chief Executive Officer of the Company; less (b) Benefits payable to the Participant from the San Jose Water Company Retirement Plan. The amount of the offset in subsection (b) shall be Actuarially Equivalent to a single life annuity commencing on the Participant's Normal Retirement Date. 3.2 A Participant who qualifies for an Early Retirement Date may elect to receive a retirement benefit based on his accrued benefits under this Article, but reduced in accordance with the early retirement provisions set forth in the San Jose Water Company Retirement Plan on the Benefit Commencement Date. 3.3 A Participant may elect to receive his retirement benefits in the form of a Straight Life Annuity or a Ten Year Certain and Life Option. A Participant who is married on his Benefit Commencement Date may also elect to receive his retirement benefit in the form of a Qualified Joint and Survivor Annuity. The benefit election of a Participant who is married on such date is not subject to spousal consent. 3.4 A Participant who elects the Ten Year Certain and Life Option shall receive his retirement benefits in the form of a 76 monthly annuity over his lifetime. If the Participant dies before one hundred and twenty (120) monthly payments (hereinafter referred to as the "period certain") have been made the Participant's designated Beneficiary or Beneficiaries shall be entitled to share equally in the Participant's monthly retirement benefit for the remainder of such period certain. A Participant electing to receive his retirement benefits in such form must designate, as described in Section 3.5, one or more Beneficiaries to receive any remaining payments under the Plan after his death. If the Participant and the designated Beneficiary or Beneficiaries die within the period certain, the remaining payments shall be made to the estate of the designated Beneficiary who last received a payment under this Section 3.4. 3.5 The Beneficiary designation of a Participant who elects to receive his retirement benefit in the form of a Ten Year Certain and Life Option shall be made on a form prepared by, and delivered to, the Committee prior to the expiration of the period certain. The Participant may revoke or change this designation at any time prior to the expiration of the period certain by delivering a subsequent form to the committee. 3.6 The amount of all benefit forms specified in Section 3.3 shall be determined in accordance with the provision in the San Jose Water Company Retirement Plan. 77 ARTICLE IV VESTING 4.1 A Participant shall vest in a percentage of his accrued retirement benefit derived from Employer Contributions, upon completion of Years of Service as follows: Years of Service Vested Percentage ---------------- ----------------- Less than 20 None 20 or More 100% 78 ARTICLE V FUNDING NATURE OF THE PLAN 5.1 The funds used for payment of benefits under this Plan and of the expenses incurred in the administration thereof shall, until such actual payment, continue to be a part of the general funds of the Company and no person other than the Company shall, by virtue of this Plan, have any interest in any such funds. Nothing contained herein shall be deemed to create a trust of any kind or create any fiduciary relationship. To the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. 79 ARTICLE VI ADMINISTRATION OF THE PLAN 6.1 The Plan shall be administered by a Committee ("Committee"), the membership of which will be selected from time to time by the President and Chief Executive Officer of the Company. The Committee shall have the exclusive authority and responsibility for all matters in connection with the operation and administration of the Plan. The Committee's powers and duties shall include, but shall not be limited to, the following: (a) responsibility for the compilation and maintenance of all records necessary in connection with the Plan; (b) authorizing the payment of all benefits and expense of the Plan as they become payable under the Plan; (c) reduce or otherwise adjust amounts payable under the Plan if payments are made in error; and (d) authority to engage such legal accounting and other professional services as it may deem proper. Decisions by the Committee shall be final and binding upon all parties. 6.2 The Committee, from time to time, may allocate to one or more of its members or to any other person or persons or organizations any of its rights, powers, and duties with respect to the operation and administration of the Plan. Any such allocation shall be reviewed from time to time by the Committee and shall be terminable upon such notice as the Committee, in its sole discretion, deems reasonable and prudent under the circumstances. 6.3 The members of the Committee shall serve without compensation, but all benefits payable under the Plan and all expenses properly incurred in the administration of the Plan, including all expenses properly incurred by the Committee in exercising its duties under the Plan, shall be borne by the Company. 80 ARTICLE VII AMENDMENTS AND TERMINATION 7.1 The Board of Directors reserves the power at any time to terminate this Plan and to otherwise amend any portion of the Plan other than this Article Vl; provided, however, that no such action shall adversely affect the right of any Participant or beneficiary to a benefit to which he has become entitled pursuant to this Plan. 7.2 Notice of termination or amendment of the Plan, pursuant to Section 6.1, shall be given in writing to each Participant and beneficiary of a deceased Participant. 81 ARTICLE VIII MISCELLANEOUS 8.1 The headings and subheadings of this instrument are inserted for convenience of reference only and are not to be considered in the construction of this Plan. Wherever appropriate, words used in the singular may include the plural, plural may be read as the singular and the masculine may include the feminine. 8.2 The instrument creating the Plan shall be construed, administered, and governed in all respects in accordance with the laws of the State of California to the extent not preempted by ERISA. If any provision of this Plan shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions shall continue to be fully effective. 8.3 Participation in this Plan shall not give to any employee the right to be retained in the employ of the Company nor any right or interest in this Plan other than is herein specifically provided. 8.4 Any payment to a Participant or beneficiary or the legal representative of either, in accordance with the terms of this Plan shall to the extent thereof be in full satisfaction of all claims such person may have against the Company hereunder, which may require such payee, as a condition to such payment, to execute a receipt and release therefore in such form as shall be determined by the Company. 8.5 This Plan is intended to qualify for exemption from Parts II, III, and IV of ERISA, as amended, as an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees under Sections 201(2), 301(a)(3) and 401(a)(1) of such Act, and shall be so interpreted. 8.6 Benefits under this Plan shall not be alienated, hypothecated or otherwise encumbered, and to the maximum extent permitted by law such benefits shall not in any way be 82 subject to claim of creditors or liable to attachment, execution or other process of law. 8.7 If an individual entitled to receive retirement benefits is determined by the Committee or is adjudged to be legally incapable of giving valid receipt and discharge for such benefits, they shall be paid to the duly appointed and acting guardian, if any, and if no such guardian is appointed and acting, to such person as the Committee may designate. Such payment shall, to the extent made, be deemed a complete discharge for such payments under this Plan. 83 8.8 If the Committee is unable to make the determinations required under this Plan in sufficient time for payments to be made when due, the Committee shall make the payments upon the completion of such determinations with interest at a reasonable rate from the due date and may, at its option, make provisional payments, subject to adjustment, pending such determination. 8.9 For purposes of this Plan, actuarial equivalents shall be determined on the basis of mortality tables and interest factors most recently employed for the purpose of the San Jose Water Company Retirement Plan. IN WITNESS WHEREOF, San Jose Water Company has caused its authorized officers to execute this instrument in its name and on its behalf. SAN JOSE WATER COMPANY ___________________________ By_______________________ (Date) 84 EX-10.4 4 p16744_ex10-4.txt FIRST AMENDMENT TO RETIREMENT PLAN EXHIBIT 10.4 FIRST AMENDMENT TO SAN JOSE WATER COMPANY EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN (Effective January 1, 1992) The San Jose Water Company Executive Supplemental Retirement Plan is hereby amended effective January 1, 1993 to read as follows: FIRST: Section 3.1 is amended to read as follows: "3.1. The retirement benefits under this Plan to which a Participant shall be entitled, shall be an amount equal to the difference, if any, between (a) and (b) below:" "(a) Two and two tenths percent (2.2%) of the Final Average Compensation of a Participant multiplied by the Participant's Years of Service (not to exceed twenty (20) years); (ii) one and one tenth percent (1.1%) of the Final Average Compensation multiplied by the Participant's Years of Service in excess of twenty (20) (not to exceed an additional ten (10) years); and (iii) Mr. John Weinhardt shall receive an additional eight and one quarter tenths of one percent (.825%) of Final Average Compensation for each year of service as President and Chief Executive Officer of the Company; less" "(b) Benefits payable to the Participant from the San Jose Water Company Retirement Plan." "The amount of the offset in subsection (b) shall be Actuarially Equivalent to a single life annuity commencing on the Participant's Normal Retirement Date." SECOND: Except as provided herein, the San Jose Water Company Executive Supplemental Retirement Plan shall continue in full force and effect. IN WITNESS WHEREOF, San Jose Water Company has caused its authorized officers to affix the corporate name and seal hereto this __ day of ______________, 1993. San Jose Water Company By: ---------------------------------------- By: ---------------------------------------- 85 EX-21 5 p16744_ex21.txt SUBSIDIARIES OF SJW CORP EXHIBIT 21 Subsidiaries of SJW Corp. San Jose Water Company, incorporated in the State of California, doing business as San Jose Water Company. SJW Land Company, incorporated in the State of California, doing business as SJW Land Company. Crystal Choice Water Service LLC, is operated as a non-regulated affiliate of SJW Corp. with 75% ownership by SJW Corp. and 25% by Kinetico, Incorporated of Newbury, Ohio, doing business as Crystal Choice Water Service LLC. 86 EX-99.1 6 p16744_ex99-1.txt CERTIFICATION OF W. RICHARD ROTH Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of SJW Corp. (the "Company") on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, W. Richard Roth, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ W. Richard Roth - --------------------- W. RICHARD ROTH President and Chief Executive Officer March 7, 2003 87 EX-99.2 7 p16744_ex99-2.txt CERTIFICATION OF ANGELA YIP Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of SJW Corp. (the "Company") on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Angela Yip, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Angela Yip - ------------------ ANGELA YIP Chief Financial Officer and Treasurer March 7, 2003 88 -----END PRIVACY-ENHANCED MESSAGE-----