-----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, UqEWCq0sTmDf6eRhzQHGNsKxcZsLXinttvoidv2GLgLKxDldTQuRGzGIlBHz17OT m73lURmtygxL1FSEg3IBuw== 0000950005-04-000264.txt : 20040312 0000950005-04-000264.hdr.sgml : 20040312 20040312172309 ACCESSION NUMBER: 0000950005-04-000264 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040312 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: 04667036 BUSINESS ADDRESS: STREET 1: 374 W SANTA CLARA ST CITY: SAN JOSE STATE: CA ZIP: 95196 BUSINESS PHONE: 4082797800 10-K 1 p18246_form10k.txt FORM 10-K ================================================================================ 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, 2003 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 $1.042 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 30, 2003 was $183,036,524. Shares of common stock outstanding on March 7, 2004 - 9,135,441. Documents Incorporated by Reference Portions of the Registrant's Proxy Statement relating to the Registrant's 2004 Annual Meeting of Shareholders, to be held on April 29, 2004, 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 ..... 10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................ 26 Item 8. Financial Statements and Supplementary Data ............................................... 27 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ...... 47 Item 9A. Controls and Procedures ................................................................... 47 PART III Item 10. Directors and Executive Officers of the Registrant ........................................ 47 Item 11. Executive Compensation .................................................................... 48 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ................................................................................... 48 Item 13. Certain Relationships and Related Transactions ............................................ 48 PART IV Item 14. Principal Accountant Fees and Services .................................................... 48 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 48 Exhibit Index ...................................................................................... 50 Signatures ......................................................................................... 53
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 such as "expect", "estimate", "anticipate", "intends", "seeks", "plans", "projects", variation of such words, 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 or revise the information contained in this report, including the forward-looking statements for any reason. Item 1. Business (a) General Development of Business SJW Corp. (the Corporation) 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 in 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, other undeveloped land primarily in the San Jose Metropolitan area, some properties in the states of Florida and Connecticut, 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, which represents approximately 7% of its outstanding shares as of December 31, 2003. 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. 2 The purpose of an offset rate increase is to compensate utilities for increases in specific expenses, such as those for purchased water, pump tax or purchased power. 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, 2003, the balancing account had a net over-collected balance of $7,000, which included an under-collection of $382,000 accrued prior to November 29, 2001 and an over-collection of $389,000 accrued for the period from November 30, 2001 through December 31, 2003. The net under-collected balance of $262,000 as of December 31, 2002 included the aforementioned under-collection of $382,000 and an over-collection of $120,000 accrued for the period from November 30, 2001 through December 31, 2002. On September 30, 2002, the interim rate relief bill (AB2838) was signed 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. Since a CPUC decision on the requested rates on the General Rate Case application filed with the CPUC on May 23, 2003 has not been issued as of December 31, 2003, the CPUC has allowed San Jose Water Company an interim rate increase of approximately 2% effective January 1, 2004. 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 nonregulated businesses, SJW Land Company (SJW Land), which operates parking facilities and commercial building rentals, and Crystal Choice Water Service LLC (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, 2003 (in thousands) -------------------------------------------------------------- SJW SJW SJWC Land CCWS Corp. Corp. ----------- -------- ------------ --------- ---------- Operating revenue ......... $146,132 2,374 1,226 - 149,732 Net income (loss) ......... 16,979 1,096 (182)* 784 18,677 Total assets .............. 450,796 28,108 840 31,973 511,717
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 .............. 411,787 12,640 780 28,016 453,223
3
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 .............. 388,147 11,911 707 30,252 431,017
- ------------ * Before minority interest. (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 approximately 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 that is being amortized over the contract term. San Jose Water 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 consists of groundwater from wells, surface water from watershed run-off and diversion, and imported water purchased 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 supply, which during a year of normal rainfall satisfy about 6% to 8% of San Jose Water Company's current annual needs, provides 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. 4 Except in a few isolated cases before 1989 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 on all customers at the request of SCVWD. Groundwater in 2003 remained comparable to the 30-year normal level. On January 29, 2004, the SCVWD's ten reservoirs were 46.7% full with 79,163 acre-feet of water in storage. The rainfall from July 2003 to January 2004 was about the same in comparison to the 30-year average. The delivery of California and Federal contract water to the SCVWD is expected to be met 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 19.71 inches for the season from July 1 through December 31, 2003, which is slightly above the five-year average. While the water supply outlook for 2004 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 franchise rights, water rights, and necessary rights-of-way 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 5 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. On April 11, 2003, VTA filed the eminent domain lawsuit. As a part of the proceedings, VTA has transferred funds from the escrow account into a court deposit account to secure its ongoing right of possession for construction of the light rail station pending final litigation. Compensation for the taking of property will be determined by the court or by way of settlement between SJW Land Company and VTA. This transaction will be recorded and it is expected to result in an increase to net income when the compensation issue is settled or a final court order is rendered. 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 currently 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 currently 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, 2003, San Jose Water Company had 301 employees, of whom 80 were executive, administrative or supervisory personnel, and of whom 221 were members of unions. San Jose Water Company reached a two-year collective bargaining agreement with the Utility Workers of America, representing the majority of employees, and the International Union of Operating Engineers, representing certain employees in the engineering department, covering the period from January 1, 2004 through December 31, 2005. Both groups are affiliated with the AFL-CIO. The agreement includes approximately 3% and 3.5% wage adjustments for union workers for calendar years 2004 and 2005, respectively, with minor benefit modifications. 6 Executive Officers of the Registrant
Name Age Offices and Experience - ------------------------- ----- ------------------------------------------------------------- W.R. Roth ............... 51 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. Mr. Roth has served as a director of SJW Corp., San Jose Water Company and SJW Land Company since 1994. R.J. Balocco ............ 54 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 .......... 58 San Jose Water Company - Senior Vice President, Operations. Prior to becoming Sr. Vice President of Operations, he was Vice President of Operations since 1996. Mr. Belhumeur has been with San Jose Water Company since 1970. D. Drysdale ............. 48 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 joined San Jose Water Company in 1992. J. Johansson ............ 58 San Jose Water Company - Vice President, Human Resources. Prior to becoming Vice President, Human Resources in 1999, he was Director of Human Resources in 1998. Prior to 1998 he was Personnel Manager. Mr. Johansson has been with San Jose Water Company since 1976. R.J. Pardini ............ 58 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 .................. 50 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 ................ 53 San Jose Water Company - Senior Vice President, Administration from April 2003. Prior to April 2003, he was Vice President, Water Quality. Mr. Yoo has been with San Jose Water Company since 1985. R.A. Loehr .............. 57 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 ............... 34 San Jose Water Company - Controller. He has been with San Jose Water Company since December 16, 2002. He served as 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.'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 at http://www.sjwater.com, as soon as reasonably practicable after the Corporation 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 255 million gallons per day and the present capacity for taking purchased water is approximately 172 million gallons per day. The gravity water collection system has a physical delivery capacity of approximately 29 million gallons per day. During 2003, a maximum and average of 211 million gallons and 132 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 defects in title which do not materially affect their use. SJW Land Company owns approximately eight acres of property adjacent to San Jose Water Company's general office facilities, approximately 28 acres of property in the states of Florida and Connecticut, and approximately five undeveloped acres of land and commercial properties primarily 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 31% 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 20% of SJW Land Company's revenue is generated from this commercial building. SJW Land Company has sold San Tomas station, a nonutility property in March 2003 and subsequently in April 2003, reinvested the property sale proceeds by acquiring two income producing properties in the States of Connecticut and Florida. Approximately 32% of SJW Land's revenue is generated from these two income producing properties. SJW Land Company also owns a 70% limited partnership interest in 444 West Santa Clara Street, L.P., a real estate limited partnership that owns and operates an office building. Item 3. Legal Proceedings SJW Corp. is subject to ordinary routine litigation incidental to its business. Other than as disclosed regarding the eminent domain proceeding in "Competition and Condemnation" under Item 1, "Business", there are no other pending legal proceedings to which the Corporation or any of its subsidiaries is a party or to which any of its properties is the subject that are expected to have a material effect on the Corporation's financial position, results of operations or cashflows. 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". Stock Split On March 1, 2004, SJW Corp. effected a three-for-one split on the Corporation's common stock for holders of record on February 10, 2004. The share and per share data presented herein has been adjusted to reflect the aforementioned stock split. 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 2003 and 2002 fiscal years is contained in the section captioned "Market Price Range of Stock" in the tables set forth in Note 15 of "Notes to Consolidated Financial Statements" in Part II, Item 8. (b) Holders There were 700 record holders of SJW Corp.'s common stock on December 31, 2003. (c) Dividends Quarterly dividends have been paid on SJW Corp.'s and its predecessor's common stock for 241 consecutive quarters and the quarterly rate has been increased during each of the last 36 years. The information required by this item as to the cash dividends paid on common stock in 2003 and 2002 is contained in the section captioned "Dividends per share" in the tables set forth in Note 15 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
2003 2002 2001 2000 1999 -------------- ------------ ------------ ------------ ----------- Consolidated Results of Operations (in thousands) Operating revenue ...................................... $ 149,732 145,652 136,083 123,157 117,001 Operating expense: Operation ............................................. 88,241 89,137 84,156 76,622 69,264 Maintenance ........................................... 7,724 7,866 7,090 6,881 6,638 Taxes ................................................. 15,588 14,078 11,770 11,496 12,713 Depreciation and amortization ......................... 15,225 14,013 13,240 11,847 10,235 ---------- ------- ------- ------- ------- Total operating expense ............................. 126,778 125,094 116,256 106,846 98,850 ---------- ------- ------- ------- ------- Operating income ....................................... 22,954 20,558 19,827 16,311 18,151 Interest expense, other income and deductions .......... 4,277 6,326 5,810 5,646 2,267 ---------- ------- ------- ------- ------- Net income ............................................. 18,677 14,232 14,017 10,665 15,884 Dividends paid ......................................... 8,861 8,405 7,834 7,491 7,379 ---------- ------- ------- ------- ------- Invested in the business ............................... $ 9,816 5,827 6,183 3,174 8,505 ========== ======= ======= ======= ======= Consolidated Per Share Data Net income ............................................. $ 2.04 1.56 1.53 1.17 1.73 Dividends paid ......................................... $ 0.97 0.92 0.86 0.82 0.80 Shareholders' equity at year-end ....................... $ 18.21 16.80 16.35 15.80 15.75 Consolidated Balance Sheet (in thousands) Utility plant and intangible assets .................... $ 583,709 541,919 507,227 462,892 432,262 Less accumulated depreciation and amortization ......... 174,985 161,576 149,721 139,396 129,828 ---------- ------- ------- ------- ------- Net utility plant ................................... 408,724 380,343 357,506 323,496 302,434 ---------- ------- ------- ------- ------- Nonutility property .................................... 27,629 10,487 10,309 9,979 10,133 Total assets ........................................... 511,717 453,223 431,017 391,930 372,427 Capitalization: Shareholders' equity .................................. 166,368 153,499 149,354 144,325 143,894 Long-term debt ........................................ 139,614 110,000 110,000 90,000 90,000 ---------- ------- ------- ------- ------- Total capitalization ................................ $ 305,982 263,499 259,354 234,325 233,894 ========== ======= ======= ======= ======= Other Statistics - San Jose Water Company Customers at year-end .................................. 220,100 219,400 219,000 218,500 217,200 Average revenue per customer ........................... $ 664.99 652.79 612.78 556.99 534.98 Investment in utility plant per customer ............... $ 2,652 2,470 2,316 2,118 1,990 Miles of main at year-end .............................. 2,430 2,422 2,419 2,419 2,409 Water production (million gallons) ..................... 49,593 52,068 52,122 52,021 51,166 Maximum daily production (million gallons) ............. 211 216 199 217 207 Population served (estimate) ........................... 992,000 989,000 988,000 985,000 979,000
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. San Jose Water Company is a publicly traded investor-owned water utilities. The United States water utility industry is largely fragmented and is dominated by the municipal-owned water systems. Unlike 10 many other industries, the water utility is regulated, and provides a life-sustaining product. This makes the water utilities subject to lower business cycle risks than non-regulated industries. Throughout the years, the company continued to invest in utility plant, which reflected a diligent and disciplined approach to stewardship of the water system. Additionally, the company has continued to expand its existing portfolio of non-regulated water service contracts. SJW Land Company, a wholly owned subsidiary, owns and operates a 750-space surface parking facility, which is located adjacent to the San Jose Water Company's headquarters and the HP Pavilion in San Jose, California. SJW Land Company also owns commercial buildings, other undeveloped land primarily in the San Jose Metropolitan area, some other properties in the states of Florida and Connecticut, and a 70% limited partnership interest in 444 West Santa Clara Street, L.P. SJW Land Company continued to develop its asset base into a relatively low risk, moderately leveraged, diversified portfolio of income-producing properties through tax-advantaged exchanges. This provides consistent and sustainable earnings to the company. 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 or approximately 7% of California Water Service Group as of December 31, 2003. On Janurary 29, 2004, the Board of Directors of SJW Corp. approved a three-for-one split of its common stock. The trading price has subsequently been adjusted for three for one on March 2, 2004. All share and per share data has been adjusted to reflect the three-for-one stock split. Critical Accounting Policies: SJW Corp. has identified accounting policies delineated below as the policies critical to its 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 at the date of the financial statements, and revenues and expenses during the reporting period. 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 Corporation's business operations is discussed throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations" where such policies affect the Corporation'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 Corporation'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. The balancing account balance varies with the seasonality of the water utility business such that during the summer months when the demand for water is at its peak, the balancing account tends to reflect an under-collection, while during the winter months when demand for water is relatively lower, the balancing account tends to reflect an over-collection. Had the balancing account been recognized in San Jose Water Company's financial statements, San Jose Water Company's retained earnings would be increased by the amount of balancing account over-collection, as the case may be, or decreased by the amount of balancing account under-collection, less applicable taxes. At December 31, 2003, the balancing account had a net over-collected balance of $7,000, which included an under-collection of $382,000 accrued prior to November 29, 2001 and an over-collection of $389,000 accrued for the period from November 30, 2001 through December 31, 2003. The net-under-collected 11 balance of $262,000 as of December 31, 2002 included the aforementioned under-collection of $382,000 and an over-collection of $120,000 accrued for the period from November 30, 2001 through December 31, 2002. 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 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 San Jose Water Company's experiences in unaccounted-for water. Actual results will differ from those estimates, which would result in operating revenue being adjusted in the period that the revision to the San Jose Water Company's estimates is determined. As of December 31, 2003 and 2002, accrued unbilled revenue was $6,205,000 and $6,605,000, respectively. Unaccounted for water for 2003, 2002 and 2001 approximated 6.9%, 6.6% and 6.7%, respectively, as a percentage of production. The estimate is based on the results of past experience, the trend and efforts in reducing the company's unaccounted for water through mains replacement and lost water reduction programs. A 0.1% change in unaccounted for water affects unbilled revenue by approximately $100,000. 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 and credits are recoverable in the future revenue of the San Jose Water 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. No disallowance had to be recognized at December 31, 2003 and December 31, 2002. The net regulatory assets recorded by San Jose Water Company were $7,976,000 and $6,013,000 as of December 31, 2003 and 2002, respectively. The increase was primarily due to recognition of asset retirement obligations in accordance with Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations", which was adopted on January 1, 2003. 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, including the evaluation of the treatment acceptable in the water utility industry and its regulatory agency. These differences result in deferred tax assets and liabilities, which are included within the balance sheet. If actual results, due to changes in the regulatory treatment, or significant changes in tax-related estimates or assumptions or changes in law, differ materially from these estimates, the provision for income taxes will 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". 12 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, 2003, the plan assets consist of approximately 22% bonds, 11% cash and 67% equities. Furthermore, equities are to be diversified by industry groups to balance for capital appreciation and income. In addition, all investments are publicly traded. San Jose Water Company uses an expected rate of return on plan assets of 8% in its actuarial computation. The distributions of assets are not considered highly volatile and sensitive to changes in market rates and prices. Furthermore, foreign assets are not included in the investment profile and thus 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 unrealized market losses in the three years prior to 2003. As a result of this, the pension expense in 2003 included the amortization of unrealized market losses on pension assets. Unrealized market losses on pension assets are amortized over 14 years for actuarial expense calculation purposes. Market losses in 2002 increased expense by approximately $1,131,000 in 2003, and similar market losses in 2001 increased expense by approximately $700,000 in 2002. The company utilizes Moody's 'A' and 'Aa' rated bonds in industrial, utility and financial sectors with an outstanding amount of $1 million or more in determining the discount rate used in calculating the liabilities at the measurement date. The composite discount rates used were 6.25% and 6.75% for the years ending December 31, 2003 and 2002, respectively. As a result of the decrease in discount rate used, the pension liability of SJW Corp. increased. Stock-Based Compensation Plans SJW Corp. has a stockholder-approved long-term incentive plan that allows granting of nonqualified stock options, performance shares and dividend units. Under the plan, a total of 900,000 common shares are authorized for option awards and grants. The Corporation has adopted Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", utilizing the Black-Scholes option-pricing model to compute the fair value of options at grant date as basis for the stock-based compensation for financial reporting purposes. The weighted-average assumptions utilized include: expected dividend yield - 3.4%, expected volatility - 27%, risk-free interest rate - 2.86%, expected holding period - five years. In addition to the option grants, SJW Corp. has granted restricted stock units to a key employee of the Corporation, which were valued at market price at the date of grant. The Corporation is correspondingly recognizing the fair market value of the restricted stock granted as compensation expense, over the vesting period of three years. Additionally, the restricted stock units granted to the non-employee Board members from the conversion of cash pension benefits were valued at market price at the date of grant. The Corporation is correspondingly recognizing the fair market value of the unvested restricted stock granted as compensation expenses, over the vesting period of three years. 13 Results of Operations: Overview SJW Corp.'s consolidated net income for twelve months ending December 31, 2003 was $18,677,000, compared to $14,232,000 for the same period in 2002. The increase of $4,445,000 or 31% includes an after-tax gain of $3,030,000 from the sale of a SJW Land Company property in the first quarter of 2003. Favorable weather conditions brought greater availability of the less costly surface water supply to SJW Corp. in 2003 resulting in reduced water production costs and increased net income. Operating Revenue Consolidated Operating Revenue
2003 2002 2001 ----------- --------- ---------- (in thousands) San Jose Water Company ................... $146,132 143,092 134,047 SJW Land Company ......................... 2,374 1,860 1,752 Crystal Choice Water Service LLC ......... 1,226 700 284 -------- ------- ------- $149,732 145,652 136,083 ======== ======= =======
The change in consolidated operating revenue was due to the following factors:
2003 vs 2002 2002 vs 2001 Increase/(decrease) Increase/(decrease) ------------------------ ------------------ (in thousands) Utility: Consumption changes ...................... $ (5,117) (3%) $ (198) - New customers increase ................... 353 - 89 - Rate increases ........................... 7,804 5% 9,154 7% Parking and lease ........................ 514 - 108 - Crystal Choice Water Service LLC ......... 526 1% 416 - -------- -- ------- --- $ 4,080 3% $ 9,569 7% ======== == ======= ===
2003 vs. 2002 The revenue increase consists of $3,040,000 from San Jose Water Company, and $1,040,000 from SJW Land Company and Crystal Choice Water Service LLC. The increase in revenue in San Jose Water Company was mainly due to cumulative rate increases from January through July 2003, which was partially offset by a decrease in customer consumption. The rate increases resulted from San Jose Water Company's latest general rate case application and an offset rate increase for production costs adjustments in July 2003. SJW Land Company's lease revenue increased $514,000 primarily due to the addition of two commercial properties in March 2003 to its portfolio. Crystal Choice Water Service LLC's revenue increased $526,000 over 2002 due to an improved marketing strategy. 2002 vs. 2001 Consolidated operating revenue for 2002 increased by $9,569,000 or 7% over 2001 mainly due to two rate increases during the period from January through July 2002. This resulted from San Jose Water Company's general rate case application in April 2001 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. Crystal Choice Water Service LLC's revenue increased $416,000 over 2001 due to an improved marketing strategy. 14 The following table represents operating revenues and number of customers by customer group of San Jose Water Company: Operating Revenue by Customer Group 2003 2002 2001 ----------- --------- ---------- (in thousands) Residential and Business ......... $134,121 130,784 122,345 Industrial ....................... 980 1,060 1,017 Public Authorities ............... 7,856 8,174 7,827 Others ........................... 3,175 3,074 2,858 -------- ------- ------- $146,132 143,092 134,047 ======== ======= ======= Number of Customers 2003 2002 2001 --------- --------- ---------- Residential and Business ......... 215,029 214,378 214,133 Industrial ....................... 91 92 98 Public Authorities ............... 1,689 1,664 1,653 Others ........................... 3,291 3,266 3,116 ------- ------- ------- 220,100 219,400 219,000 ======= ======= ======= Operating Expense Operating Expense by Subsidiary
2003 2002 2001 ----------- --------- ---------- (in thousands) San Jose Water Company ................... $123,422 122,074 114,285 SJW Land Company ......................... 1,463 1,318 1,303 Crystal Choice Water Service LLC ......... 1,408 1,052 778 SJW Corp. ................................ 485 650 (110) -------- ------- ------- $126,778 125,094 116,256 ======== ======= =======
Operating expense increased $1,684,000 or 1% in 2003 compared to 2002, and $8,838,000 or 8% in 2002 compared to 2001. 15 The change in operating expense was due to the following:
2003 vs 2002 2002 vs 2001 Increase/(decrease) Increase/(decrease) ------------------------ ------------------ (in thousands) Water Production costs: Increased surface water supply ...................... $ (3,879) (3%) $ (250) - Usage and new customers ............................. (3,742) (3%) (382) - Pump tax and purchased water price increase ......... 4,269 4% 1,910 1% Energy prices ....................................... (696) (1%) 344 - -------- -- ------- --- Total water production costs ........................ (4,048) (3%) 1,622 1% Administrative and general ............................. 2,736 2% 2,218 2% Other operating expense ................................ 416 - 1,141 1% Maintenance ............................................ (142) - 776 1% Property taxes and other non-income taxes .............. 645 - 41 - Depreciation and amortization .......................... 1,212 1% 773 1% Income taxes ........................................... 865 1% 2,267 2% -------- -- ------- --- $ 1,684 1% $ 8,838 8% ======== == ======= ===
The various components of operating expenses are discussed below. Water production costs 2003 vs. 2002 Total water production costs decreased $4,048,000 in 2003 in comparison to 2002. The decrease in water production costs was primarily attributable to the greater availability of the less costly surface water supply and a decrease in customer consumption, partially offset by increases in rates of purchased water and pump tax from Santa Clara Valley Water District (SCVWD) which commenced in July 2003. Water production was lower than in 2002 by 2,475 MG (million gallons), and was consistent with the changes in customer consumption. 2002 vs. 2001 The increase in production costs in 2002 as compared to 2001, was primarily due to an increase in SCVWD water production rates (pump tax and purchased water) effective 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 San Jose Water Company's distribution mix and optimal pumping pattern for 2002. Sources of Supply
2003 2002 2001 --------- -------- --------- (million gallons) Purchased water .............................. 27,376 30,566 27,833 Ground water ................................. 16,168 18,430 21,368 Surface water ................................ 5,670 2,661 2,515 Reclaimed water .............................. 379 411 406 ------ ------ ------ 49,593 52,068 52,122 ====== ====== ====== Average water production cost per MG ......... $ 1,209 1,229 1,196 ======= ====== ======
San Jose Water Company's water supply consists of groundwater from wells, surface water from watershed run-off and diversion, and imported water purchased from the SCVWD. Surface water is the 16 least expensive source of water and increased reliance on surface water due to its greater availability in 2003 reduced water production costs by approximately $3,879,000. In 2002, however, San Jose Water Company purchased more imported water than pumped water, which became more expensive as a result of an increase in energy costs. Water production in 2003 decreased 2,475 million gallons from 2002. During 2003, the availability of the surface water was significantly greater than in 2002. Water production in 2002 decreased 54 million gallons over 2001. The changes are consistent with the related operating expenses. Administrative, General and Other Operating Expense The following table represents components of administrative, general and other operating expense: Administrative, General and Other Operating Expense 2003 2002 2001 ---------- -------- -------- (in thousands) Source of supply ...................... $ 704 732 757 Water treatment and quality ........... 1,541 1,539 1,516 Pumping ............................... 1,394 1,407 1,296 Transmission and distribution ......... 2,979 2,877 2,796 Customer accounts ..................... 4,403 4,186 3,599 Administrative and general ............ 16,202 13,466 11,248 Others ................................ 1,083 947 583 ------- ------ ------ $28,306 25,154 21,795 ======= ====== ====== 2003 vs. 2002 Administrative, general and other operating expense included expenses incurred in maintaining the water system, delivering the water supply, testing the water quality, providing customer service and general administration functions. Administrative, general and other operating expense in 2003 increased $3,152,000 or 13% compared to 2002. The increases consisted primarily of: (1) $1,326,000 in salaries and wages in accordance with bargaining unit wage escalation which was incurred in all departments, (2) $1,131,000 in pension costs primarily as a result of the decline in the market value of retirement trust assets, and (3) $980,000 in business and employee insurance costs. 2002 vs. 2001 Administrative, general and other operating expense in 2002, increased $3,359,000 or 15% 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 business and employee insurance costs. Maintenance Expense Maintenance expense decreased $142,000 or 2% in 2003 compared to 2002, and increased $776,000 or 11% in 2002 compared to 2001. The level of maintenance expense varied with the level of public work projects instituted by the government, weather condition and the timing and nature of the facilities failure occurrence. Property Taxes and Other Non-Income Taxes Property taxes and other non-income taxes for 2003 increased $645,000 in comparison to 2002 due primarily to the receipt of $299,000 property tax adjustments in 2002 for the taxes on properties paid in prior years. 17 Depreciation Depreciation expense increased $1,212,000 and $773,000 in 2003 and 2002 respectively, due to higher investments in utility plants. Income Tax Expense Income tax expense for 2003 excluding taxes on gain on sale of property of $2,105,000, was $10,523,000 compared to $9,658,000 for 2002, representing an increase of $865,000 or 9% due to higher earnings in 2003. The effective consolidated income tax rates for 2003, 2002, and 2001 were 41%, 40%, and 35%, respectively. The 2001 effective tax rate was below the rates for the subsequent 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 Other income for the year ended December 31, 2003 included an after-tax gain of $3,030,000 on the sale of a nonutility property. In April 2003, SJW Corp. reinvested the sale proceeds in two income properties in the states of Connecticut and Florida. Please refer to Note 13 "Sale of Nonutility Property" under Notes to Consolidated Financial Statements. Interest expense increased $668,000, or 9%, due to the issuance of Senior Notes Series G in September 2003, execution of two mortgages in connection with the purchases of two income properties in the states of Connecticut and Florida, and higher average borrowing in 2003. SJW Corp.'s consolidated weighted average cost of long-term debt, including the two mortgages acquired in 2003 and the amortization of debt issuance costs, was 7.5% for the year ended December 31, 2003 and 7.9% for the years ended December 31, 2002 and 2001. Other comprehensive income in 2003 was $2,035,000 which included an unrealized gain adjustment of $2,434,000 on the upturn in the market value of investment in California Water Service Group, offset by an increase of $399,000 in comprehensive loss associated with the Corporation's minimum pension liability. Liquidity and Capital Resources: San Jose Water Company's budgeted capital expenditures for 2004, exclusive of capital expenditures financed by customer contributions and advances, are as follows: Budgeted Capital Expenditures 2004 -------------------- (in thousands) Water treatment ..................... $ 668 2% Reservoirs and tanks ................ 1,943 6% Pump stations and equipment ......... 2,434 8% Distribution system ................. 17,926 58% Equipment and other ................. 8,187 26% ------- --- $31,158 100% ======= === The 2004 capital expenditures budget is concentrated in main replacements. Approximately $12,000,000 will be spent to replace San Jose Water Company's pipes and mains which is funded through working capital. Starting in 1997, San Jose Water Company began a four-phased Infrastructure Study establishing a systematic approach to replace its utility facilities. 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 was completed in July, 2002 and is being used as a guide for future capital improvement programs, and will serve as the master plan for the company's replacement program for the next 20 years. 18 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. The company expects to incur approximately $176,000,000 in capital expenditures, which includes replacement of pipes and mains, and maintaining water systems, over the next five years, exclusive of customer contributions and advances. The company's actual capital expenditures may vary from its projections due to changes in the expected demand for services, weather patterns, actions by governmental agencies and general economic conditions. Total additions to utility plant normally exceed company-financed additions by several million dollars because certain new facilities are constructed using advances from developers and contributions in aid of construction. 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 2003, SJW Corp. invested an additional $75,000 in Crystal Choice Water Service LLC related to its 75% share of capital investment. SJW Corp. does not expect to make a significant cash contribution in Crystal Choice Water Service LLC in 2004. In 2003, there was an increase in the common dividends declared and paid on SJW Corp.'s common stock representing 47% of the net income for 2003. Historically, SJW Corp. has maintained its dividend payment ratio at approximately 50% of its earnings. 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 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's financing activity is designed to achieve a capital structure consistent with regulatory guidelines of approximately 50% debt and 50% equity. Company internally-generated funds, which includes allowance for depreciation and deferred income taxes, have provided approximately 50% of the future cash requirements for San Jose Water Company's capital expenditure. Due to its strong cash position and low financial leverage condition, funding for its future capital expenditure program will be provided primarily through long-term debt. San Jose Water Company and its parent, SJW Corp. do not anticipate the issuance of any common equity to finance future capital expenditure. San Jose Water Company has outstanding $130,000,000 of unsecured senior notes as of December 31, 2003. 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 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, 2003, San Jose Water Company's funded debt was 48.6% of total capitalization and the net income available for interest charges was 391% of interest charges. San Jose Water Company issued $20,000,000 of Senior Notes Series G on September 2, 2003. Proceeds from the sales of the Senior Notes Series G were used to repay short-term borrowings and to fund construction expenditures. 19 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 2.39%. Funds in the above amount will be received for the retrofit of San Jose Water Company's water treatment plant. As of December 31, 2003, the loan has not been funded. San Jose Water Company will request the funding in 2004 as soon as all the loan documentation and contract requirements are met. SJW Land Company In March 2003, SJW Land Company sold nonutility property and recognized a gain of $3,030,000, net of tax. Subsequently, SJW Land Company reinvested the proceeds from the sale of nonutility property by acquiring two properties in the states of Connecticut and Florida. In connection with the acquisition, SJW Land Company executed mortgages in the amount of $9,900,000 in April 2003. The mortgage loans are due in ten years and amortize over twenty-five years with a fixed interest rate of 5.96%. The loan agreements generally restrict the company from prepayment in the first five years and requires submission of periodic financial reports as part of the loan covenants. The properties were leased to a multinational company for twenty years. SJW Corp. SJW Corp.'s consolidated long-term debt was 46% of total capitalization as of December 31, 2003 which is below the industry average published in the C.A. Turner's Utilities Report. SJW Corp. enjoys a low debt burden and strong liquidity, is fully capable of providing financial flexibility to future regulated and nonregulated growth opportunities and capital expenditure requirements. SJW Corp. and its subsidiaries have an unsecured line 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, 2003, SJW Corp. and its subsidiaries had available unused short-term bank line of credit of $30,000,000. Cost of borrowing averaged 2.57% for the twelve months of 2003. The line of credit expires on July 1, 2005. SJW Corp.'s contractual obligation and commitments as of December 31, 2003 are as follows:
Contractual Obligations (dollars in thousands) Due in ----------------------------------------------- Less than 1-5 After Total 1 year Years 5 Years ----------- -------- --------- ---------- Senior notes ............................... $130,000 - - 130,000 Mortgages .................................. 9,799 184 1,101 8,514 Advance for construction ................... 79,311 2,024 9,158 68,129 Other ...................................... 891 431 460 - -------- ----- ------ ------- Total contractual cash obligations ......... $220,001 2,639 10,719 206,643 ======== ===== ====== =======
In addition to all the obligations listed above, San Jose Water Company purchases water from Santa Clara Valley Water District (SCVWD) under terms of a master contract 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 ($27,300,000) of water, from SCVWD in the contract year ending June 30, 2004. 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 with an outstanding balance of $4,333,000 as of December 31, 2003 which was secured by the partnership property. The mortgage loan is non-recourse to SJW Land Company. 20 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% limited partnership interest. A commercial building is constructed on the partnership property and is leased to an international real estate firm under a twelve-year 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%. This rate of return is within the range of recent rates of return authorized by the CPUC for water utilities. San Jose Water Company received a step rate increase in January 2003 totaling about 3% to recover projected operating cost increase for 2003. Additionally, San Jose Water Company received offset rate increases in March and July 2003, totaling about $6,000,000 or approximately 4%, to recover the increased cost primarily associated with the transfer of the maintenance responsibility for approximately 12,000 fire hydrants from the City of San Jose to San Jose Water Company, as well as the increased cost of purchased water and higher pump tax charged to San Jose Water Company by the SCVWD. On May 23, 2003, San Jose Water Company filed a General Rate Case application with the CPUC to increase rates by $25,793,000 or 18.2% in 2004, $5,434,000 or 3.2% in 2005, and $5,210,000 or 3.0% in 2006. San Jose Water Company is seeking these proposed increases to cover higher costs of providing water service, including higher costs of power, purchased water, pump tax, labor, security, water quality testing and reporting, and to allow for necessary improvements to the water system. San Jose Water Company is also requesting rate recovery of the current balance of $71,000 in its Water Contamination Memorandum Account, as well as recovery of an under-collection of $382,000 accrued in its pre-November 29, 2001 Balancing Account. Finally, San Jose Water Company is requesting a rate of return on equity of 11.5% for the years 2004 through 2006. A CPUC decision on the application is expected in early 2004. On September 30, 2002, the interim rate relief bill (AB 2838) was signed 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 principal, this mechanism is designed to eliminate the adverse financial impact on water utilities caused by regulatory delays in general rate cases. The bill went into effect on January 1, 2003. Since a CPUC decision on the requested rates on the General Rate Case application filed with the CPUC on May 23, 2003 has not been issued as of December 31, 2003, the CPUC has allowed San Jose Water Company an interim rate increase of approximately 2% effective January 1, 2004. 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 21 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 future 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 CPUC 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 authorizing water utilities to 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. San Jose Water Company had accrued an under-collection of $382,000 in its balancing account prior to November 29, 2001. San Jose Water Company requested rate recovery of the aforementioned under-collection of $382,000 in its General Rate Case application filed with the CPUC on May 23, 2003. At this time, it is unclear whether San Jose Water Company's ability to recover the aforementioned balancing account balance will be impacted. This under-collection of $382,000 is the component of the balance of balancing account as of December 31, 2003 and 2002, respectively. 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 such balance or to receive future offset rate relief. For the period from November 29, 2001 to December 31, 2003, the balancing account accumulated an over-collection of $7,000. At December 31, 2002, the balancing account, including the balances accrued prior to November 29, 2001, had an under-collection of $262,000. On June 19, 2003 the CPUC issued its final OIR decision (D.03-06-072) in which the CPUC revised the existing procedures for recovery of under-collections and over-collections in balancing accounts existing on or after November 29, 2001 as follows: (1) If a utility is within its rate case cycle and is not over earning, the utility shall recover its balancing account subject to reasonableness review; and (2) If a utility is either within or outside of its rate case cycle and is over earning, the utility's recovery of expenses from the balancing accounts will be reduced by the amount of the over earning, again subject to reasonableness review. Utilities shall use the recorded rate of return means test to evaluate earnings for all years. The CPUC is currently in the process of scheduling workshops to determine how these new requirements will ultimately be implemented. As of December 31, 2003 San Jose Water Company has received all its offset rate requests. Any future impact on San Jose Water Company's ability to recover balancing account balances and receive offset rate increases cannot be determined until San Jose Water Company's next offset rate increase request scheduled for July, 2004. 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 SCVWD, surface water from its Santa Cruz Mountains 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. 22 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 Mountains 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) system software applications that control pumps 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. Conservation efforts, construction codes which require the use of low-flow plumbing fixtures could affect water consumption. 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 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 23 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. New 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 conducted a system-wide vulnerability assessment in compliance with federal regulations Public Law 107-188 imposed on all water utilities. The assessment report was filed with the EPA on 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. The vulnerability assessment identified system security enhancements that impact water quality, health, safety and continuity of service totaling approximately $2,300,000, exclusive of the years 2001 to 2002 expenditures. These improvements were incorporated into the capital budgets to be completed by 2005. For the year ended December 31, 2003 $540,000 was spent on capital projects to improve and enhance security. 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 24 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 $1,113,000 in 2003 primarily due to the decline in valuation of the retirement plan portfolio. Market conditions, not changes in operating risk or loss experience, was the primary reason for the average liability insurance cost increase of 25% in 2003. Employee medical insurance increased approximately 8%. Medical, liability and pension expenses are expected to continue to have similar increases in 2004. Nonregulated Operations 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. On April 11, 2003, VTA filed the eminent domain lawsuit. As a part of the proceedings, VTA has transferred funds from the escrow account into a court deposit account to secure its ongoing right of possession for construction of the light rail station pending final litigation. Compensation for the taking of property will be determined by the court or by way of settlement between SJW Land Company and VTA. This transaction will be recorded and it is expected to result in an increase to net income when the compensation issue is settled or a final court order is rendered. Impact of Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, "Consolidation of Variable Interest Entities". Subsequently in December 2003, the FASB issued revised Interpretation No. 46(R). This interpretation provides guidance for determining when a primary beneficiary should consolidate a variable interest entity or equivalent structure, that functions to support the activities of the primary beneficiary. The revised interpretation is effective for the periods ending after March 15, 2004. The adoption of this statement will not have a material impact on SJW Corp.'s financial condition or results of operations. 25 Effective January 1, 2003, SJW Corp. adopted Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations", which requires businesses to record the fair value of a liability for a legal obligation to retire an asset in the period in which the liability is incurred. A legal obligation is a liability that a party is required to settle as a result of an existing or enacted law, statute, ordinance or contract. SJW Corp.'s legal obligations for retirement reflect principally the retirement of wells, which by law need to be disposed of at removal. Retirement cost has historically been recovered through rates at the time of retirement. As a result, the cumulative effect upon adoption was reflected as a regulatory asset, in the amount of $1,200,000 as of December 31, 2003. In December 2003, the FASB issued SFAS No. 132 (revised), "Employers' Disclosures about Pensions and Other Postretirement Benefits", which revises employers' disclosures about pension plans and other postretirement benefit plans. This revised statement retains and revises the disclosure requirement contained in the original SFAS No. 132 and does not change the current measurement or recognition requirements for such plans. The revised statement also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. SJW Corp. has adopted SFAS No. 132 (revised) as of December 31, 2003. 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. 26 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, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, 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 29, 2004 27 SJW CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
December 31, ------------------------- 2003 2002 ------------ ---------- ASSETS UTILITY PLANT ........................................................ $ 575,869 534,079 INTANGIBLE ASSETS .................................................... 7,840 7,840 --------- ------- 583,709 541,919 LESS ACCUMULATED DEPRECIATION AND AMORTIZATION ....................... 174,985 161,576 --------- ------- 408,724 380,343 --------- ------- NONUTILITY PROPERTY, NET ............................................. 27,629 10,487 CURRENT ASSETS: Cash and equivalents ................................................ 10,036 324 Accounts receivable: Customers .......................................................... 7,505 7,309 Other .............................................................. 1,333 2,807 Accrued unbilled utility revenue .................................... 6,205 6,605 Materials and supplies .............................................. 485 499 Prepaid expenses .................................................... 1,534 1,155 --------- ------- 27,098 18,699 --------- ------- OTHER ASSETS: Investment in California Water Service Group ........................ 30,139 26,014 Investment in joint venture ......................................... 1,110 1,144 Unamortized debt issuance and reacquisition costs ................... 3,447 3,493 Regulatory assets ................................................... 7,976 6,013 Other ............................................................... 5,594 7,030 --------- ------- 48,266 43,694 --------- ------- $ 511,717 453,223 ========= ======= CAPITALIZATION AND LIABILITIES CAPITALIZATION: Shareholders' equity: Common stock, $1.042 par value; authorized 18,000,000 shares; issued and outstanding 9,135,441 shares .................................. $ 9,516 9,516 Additional paid-in capital ......................................... 13,375 12,357 Retained earnings .................................................. 138,058 128,242 Accumulated other comprehensive income ............................. 5,419 3,384 --------- ------- Total shareholders' equity .......................................... 166,368 153,499 Long-term debt, less current portion ................................ 139,614 110,000 --------- ------- 305,982 263,499 --------- ------- CURRENT LIABILITIES: Line of credit ...................................................... - 11,450 Current portion of long-term debt ................................... 184 - Accrued pump taxes and purchased water .............................. 3,224 3,144 Purchased power ..................................................... 864 1,219 Accounts payable .................................................... 2,217 381 Accrued interest .................................................... 3,619 3,244 Accrued taxes ....................................................... 467 634 Accrued payroll ..................................................... 759 566 Work order deposit .................................................. 1,511 834 Other current liabilities ........................................... 2,231 2,128 --------- ------- 15,076 23,600 --------- ------- DEFERRED INCOME TAXES ................................................ 36,232 27,670 UNAMORTIZED INVESTMENT TAX CREDITS ................................... 1,975 2,034 ADVANCES FOR CONSTRUCTION ............................................ 79,311 70,597 CONTRIBUTIONS IN AID OF CONSTRUCTION ................................. 61,811 56,117 DEFERRED REVENUE ..................................................... 1,327 1,350 OTHER NONCURRENT LIABILITIES ......................................... 10,003 8,356 COMMITMENTS AND CONTINGENCIES ........................................ --------- ------- $ 511,717 453,223 ========= =======
See accompanying Notes to Consolidated Financial Statements. 28 SJW CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Years ended December 31 (in thousands, except share and per share data)
2003 2002 2001 ------------ ------------- ------------- OPERATING REVENUE ............................................. $ 149,732 145,652 136,083 OPERATING EXPENSE: Operation: Purchased water ............................................ 36,708 38,228 33,500 Power ...................................................... 5,296 6,805 7,814 Pump taxes ................................................. 17,931 18,950 21,047 Administrative and general ................................. 16,202 13,466 11,248 Other ...................................................... 12,104 11,688 10,547 Maintenance .................................................. 7,724 7,866 7,090 Property taxes and other nonincome taxes ..................... 5,065 4,420 4,379 Depreciation and amortization ................................ 15,225 14,013 13,240 Income taxes ................................................. 10,523 9,658 7,391 ---------- --------- --------- 126,778 125,094 116,256 ---------- --------- --------- OPERATING INCOME .............................................. 22,954 20,558 19,827 OTHER (EXPENSE) INCOME: Interest expense ............................................. (8,471) (7,803) (6,737) Gain on sale of nonutility property, net ..................... 3,030 - - Dividends .................................................... 1,237 1,232 1,226 Other, net ................................................... (73) 245 (299) ---------- --------- --------- NET INCOME ................................................. $ 18,677 14,232 14,017 ========== ========= ========= OTHER COMPREHENSIVE INCOME/(LOSS): Unrealized income/(loss) on investment, net of taxes of $1,691 in 2003, ($947) in 2002, and ($564) in 2001 ................ 2,434 (1,363) (811) Minimum pension liability adjustment, net of taxes of $276 in 2003, $220 in 2002, and $236 in 2001 ....................... (399) (319) (343) ---------- --------- --------- Other comprehensive income/(loss) .......................... 2,035 (1,682) (1,154) ---------- --------- --------- COMPREHENSIVE INCOME ...................................... $ 20,712 12,550 12,863 ========== ========= ========= EARNINGS PER SHARE ............................................ - Basic ..................................................... $ 2.04 1.56 1.53 - Diluted ................................................... $ 2.04 1.56 1.53 ========== ========= ========= COMPREHENSIVE INCOME PER SHARE - Basic ..................................................... $ 2.27 1.37 1.41 - Diluted ................................................... $ 2.26 1.37 1.41 ========== ========= ========= WEIGHTED AVERAGE SHARES OUTSTANDING - Basic ..................................................... 9,135,441 9,135,441 9,135,441 - Diluted ................................................... 9,148,476 9,135,441 9,135,441 ========== ========= =========
See accompanying Notes to Consolidated Financial Statements. 29 SJW CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands)
Accumulated Additional Other Total Common Paid-in Retained Comprehensive Shareholders' Stock Capital Earnings Income/(loss) Equity ---------- ------------ ----------- --------------- -------------- 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 Net income ............................ - - 18,677 - 18,677 Other comprehensive loss Unrealized gain on investment, net of tax effect of $1,691 ............... - - - 2,434 2,434 Minimum pension liability adjustment, net of tax effect of $276 .......... - - - (399) (399) ------- Comprehensive income .................. - - - - 20,712 Stock-based compensation .............. - 1,018 - - 1,018 Dividends paid ........................ - - (8,861) - (8,861) ------- ------ ------- ------ ------- BALANCES, DECEMBER 31, 2003 ............ $ 9,516 13,375 138,058 5,419 166,368 ======= ====== ======= ====== =======
See accompanying Notes to Consolidated Financial Statements. 30 SJW CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31 (in thousands)
2003 2002 2001 ----------- ----------- ----------- OPERATING ACTIVITIES: Net income ................................................ $ 18,677 14,232 14,017 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................... 15,225 14,013 13,240 Deferred income taxes ................................... 6,398 2,998 1,993 Stock-based compensation ................................ 492 - - Gain on sale of nonutility property, net of taxes ....... (3,030) - - Changes in operating assets and liabilities: Accounts receivable and accrued utility revenue ........ 1,678 (2,623) (973) Accounts payable, purchased power and other current liabilities .......................................... 1,584 (134) 742 Accrued pump taxes and purchased water ................. 80 53 (1,538) Accrued taxes .......................................... (167) (548) 916 Accrued interest ....................................... 375 108 347 Accrued payroll ........................................ 193 145 (54) Work order deposits .................................... 677 398 101 Other noncurrent assets and noncurrent liabilities ..... (1,984) 2,446 685 Accrued employee compensation .......................... - - (3,024) Refund due to customers ................................ - (531) (541) Other changes, net ..................................... 1,789 (1,466) (457) --------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES .................. 41,987 29,091 25,454 --------- ------- ------- INVESTING ACTIVITIES: Additions to utility plant ................................ (44,467) (37,119) (47,672) Additions to nonutility property .......................... (17,875) (477) (330) Cost to retire utility plant, net of salvage .............. (780) (1,352) (1,302) Proceeds from sale of nonutility property ................. 5,370 - - --------- ------- ------- NET CASH USED IN INVESTING ACTIVITIES ...................... (57,752) (38,948) (49,304) --------- ------- ------- FINANCING ACTIVITIES: Borrowings from line of credit ............................ 14,000 50,763 61,375 Repayments of line of credit .............................. (25,450) (50,813) (61,075) Long-term borrowings ...................................... 29,900 - 20,000 Repayments of long-term borrowings ........................ (102) - - Dividends paid ............................................ (8,861) (8,405) (7,834) Receipts of advances and contributions in aid of construction ............................................ 17,694 15,242 17,246 Refunds of advances for construction ...................... (1,704) (1,627) (1,624) --------- ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES .................. 25,477 5,160 28,088 --------- ------- ------- NET CHANGE IN CASH AND EQUIVALENTS ......................... 9,712 (4,697) 4,238 CASH AND EQUIVALENTS, BEGINNING OF YEAR .................... 324 5,021 783 --------- ------- ------- CASH AND EQUIVALENTS, END OF YEAR .......................... $ 10,036 324 5,021 ========= ======= ======= Cash paid during the year for: Interest .................................................. $ 9,148 7,782 7,730 Income taxes .............................................. $ 7,720 8,800 4,188
See accompanying Notes to Consolidated Financial Statements. 31 SJW CORP. AND SUBSIDIAIRES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2003, 2002, and 2001 (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. All intercompany transactions and balances have been eliminated on consolidation. 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 92% 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, several undeveloped real estate, some properties in the states of Florida and Connecticut, and a 70% limited partnership interest in 444 West Santa Clara Street, L.P., which is accounted for under the equity method. 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 2003, 2002, and 2001 was $266, $603, and $617, respectively. Construction in progress was $4,000, $5,720, and $9,303, at December 31, 2003, 2002, and 2001, 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 2003, 2002, and 2001 the aggregate provisions for depreciation approximated 3.2%, 3.3%, and 3.3%, 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. Depreciation expense for the years ended December 31, 2003, 2002, and 2001 was $14,435, $13,480, and $12,659, respectively. 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. 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. Intangible Assets 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 32 SJW CORP. AND SUBSIDIAIRES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2003, 2002, and 2001 - (Continued) (Dollars in thousands, except share data) 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. Cash equivalents are stated at cost plus accrued interest, which approximates fair value. The cash and equivalents balances as of December 31, 2003 are $10,036 which included $4,036 cash deposited in bank and $6,000 short-term investment. The cash and equivalents balances as of December 31, 2002 are $324 which represented cash deposited in bank. 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 considered an available-for-sale marketable security and 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, net of taxes, 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 issuance costs are amortized over the lives of the respective debt issues. Debt reacquisition costs paid on the early redemption of debt and unamortized original issuance costs are deferred and amortized over the life of the new debt. 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 tax rates expected to apply in future years. To the extent that the tax benefits of the temporary differences have previously been passed through to customers through lower water rates, management anticipates that the payment of the future tax liabilities resulting from the reversal of the temporary differences will be recoverable through rates. Therefore, a regulatory asset has been recorded for the portion of net deferred tax liabilities, which are expected to be recovered through future rates. 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 33 SJW CORP. AND SUBSIDIAIRES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2003, 2002, and 2001 - (Continued) (Dollars in thousands, except share data) 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 2004 are $2,024. 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. Asset Retirement Obligations Effective January 1, 2003, SJW Corp. adopted Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations," which requires businesses to record the fair value of a liability for a legal obligation to retire an asset in the period in which the liability is incurred. A legal obligation is a liability that a party is required to settle as a result of an existing or enacted law, statute, ordinance or contract. SJW Corp.'s legal obligations for asset retirements reflect principally the retirement of wells, which by law need to be disposed of at removal. Retirement costs have historically been recovered through rates at the time of retirement. As a result, the cumulative effect upon adoption was reflected as a regulatory asset. For the year ended December 31, 2003, SJW Corp. recorded the cumulative effect of an asset retirement obligation of $4,700 at its net present value of $1,200 as a regulatory asset, with a corresponding liability in other non-current liabilities. Revenue Revenue of San Jose Water Company includes amounts billed to customers and unbilled amounts based on estimated usage from the latest meter reading to the end of the year. Operating revenue in 2003, 2002, and 2001 includes $3,339, $3,257, and $2,912 respectively, from the operation of the City of Cupertino municipal water system. Balancing Account 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. As of December 31, 2003 and 2002, the balancing account had a net over-collected balance of $7,000 and an under-collected balance of $262,000, respectively. Stock-Based Compensation SJW Corp. follows Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", which established a fair value based method of accounting for stock-based compensation plans. The Corporation utilized the Black-Scholes option-pricing model to compute the fair value of options at grant date as basis for the stock-based compensation for financial reporting purposes. 34 SJW CORP. AND SUBSIDIAIRES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2003, 2002, and 2001 - (Continued) (Dollars in thousands, except share data) 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. Diluted earnings per share and comprehensive income per share are based upon the weighted average number of common shares including both shares outstanding and shares potentially issued in connection with stock options and restricted common stock units granted under SJW Corp.'s Long-Term Incentive Plan, and income available to common shareholders and comprehensive income, respectively, adjusted for recognized stock compensation expense. On January 29, 2004, the Board of Directors of SJW Corp. approved a three-for-one stock split of common stock. The three-for-one stock split is effective on March 2, 2004. Basic and diluted earnings and comprehensive income per share reflect the impact of this stock split. 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 18,000,000 shares of $1.042 par value common stock. At December 31, 2003 and 2002, 9,135,441 shares of common stock were issued and outstanding. At December 31, 2003 and 2002, 176,407 shares of $25 par value preferred stock were authorized. At December 31, 2003 and 2002, none were outstanding. 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 July 1, 2005. The following table represents borrowings under this bank line of credit:
2003 2002 2001 ------------ ---------- ---------- Maximum short-term borrowing ............ $ 13,950 11,500 26,100 Average amount outstanding .............. 6,251 7,219 12,650 Weighted average interest rate .......... 2.6% 3.1% 5.3% Interest rate at December 31 ............ 3.0% 3.3% 3.8% Balance as of December 31 ............... $ - 11,450 11,500
35 SJW CORP. AND SUBSIDIAIRES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2003, 2002, and 2001 - (Continued) (Dollars in thousands, except share data) Note 4. Long-Term Debt Long-term debt as of December 31 was as follows: Description Due Date 2003 2002 - -------------------------------------- ---------- ----------- --------- 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 G 5.93% ............................ 2033 20,000 - --------- ------ Total senior notes ................. $ 130,000 110,000 --------- ------- Mortgage loan 5.96% ................ 2013 $ 9,798 - --------- ------- Total debt ......................... $ 139,798 110,000 Less: Current portion .............. 184 - --------- ------- Total long-term debt ............... $ 139,614 110,000 ========= ======= 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 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 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. The mortgage loans are the obligations of SJW Land Company, are due in 2013 and amortize over twenty-five years and are secured by two lease properties; carry a fixed interest rate with 120 monthly principal and interest payments. The loan agreement generally restricts the company from prepayment in the first five years and requires submission of periodic financial reports as part of the loan covenants. An amortization schedule of the mortgage loans is as follows: Amortization Schedule ----------------------------------------- Year Total Payment Interest Principal - ---------------------- --------------- ---------- ---------- 2004 ............... $ 763 $ 579 $ 184 2005 ............... 763 568 195 2006 ............... 763 556 207 2007 ............... 763 543 220 2008 ............... 763 530 233 Thereafter ......... 10,917 8,761 2,156 The fair value of long-term debt as of December 31, 2003 and 2002 was approximately $161,981 and $119,032, respectively, using a discounted cash flow analysis, based on the current rates for similar financial instruments of the same duration. 36 SJW CORP. AND SUBSIDIAIRES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2003, 2002, and 2001 - (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:
2003 2002 2001 ---------- --------- --------- "Expected" federal income tax ............................. $10,957 8,361 7,492 Increase (decrease) in taxes attributable to: State taxes, net of federal income tax benefit .......... 1,799 1,373 1,229 Dividend received deduction ............................. (303) (302) (300) Merger related expense deduction ........................ - - (937) Other items, net ........................................ 176 226 (93) ------- ----- ----- $12,629 9,658 7,391 ======= ===== =====
The components of income tax expense were: 2003 2002 2001 ---------- ------- -------- Current: Federal ............... $ 4,199 4,740 3,946 State ................. 2,374 1,986 1,274 Deferred: Federal ............... 6,129 2,838 1,795 State ................. (73) 94 376 ------- ----- ----- $12,629 9,658 7,391 ======= ===== =====
2003 2002 2001 ---------- ------- -------- Income taxes included in operating expense .......... $10,523 9,658 7,391 Income taxes included in gain on sale of nonutility property .......................................... 2,106 - - ------- ----- ----- $12,629 9,658 7,391 ======= ===== =====
37 SJW CORP. AND SUBSIDIAIRES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2003, 2002, and 2001 - (Continued) (Dollars in thousands, except share data) The components of the net deferred tax liability as of December 31 were as follows:
2003 2002 ---------- --------- Deferred tax assets: Advances and contributions ................... $14,291 14,121 Unamortized investment tax credit ............ 1,063 1,095 Pensions and postretirement benefits ......... 2,784 2,061 California franchise tax ..................... 628 524 Other ........................................ 575 567 ------- ------ Total deferred tax assets ....................... $19,341 18,368 Deferred tax liabilities: Utility plant ................................ $39,596 33,891 Investment ................................... 10,102 8,411 Deferred gain-property transfer .............. 3,537 - Debt reacquisition costs ..................... 991 1,041 Other ........................................ 1,347 2,695 ------- ------ Total deferred tax liabilities .................. 55,573 46,038 ------- ------ Net deferred tax liabilities .................... $36,232 27,670 ======= ======
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 Intangible assets consist of a concession fee 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, $288, and $289 for the years ended December 31, 2003, 2002, and 2001, respectively. Amortization expense for 2004, 2005, 2006, 2007, and 2008 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 2003 2002 - ----------------------------------------- --------- --------- Concession fees ....................... $6,800 $6,800 Other intangibles ..................... 1,040 1,040 ------ ------ Intangible assets ..................... $7,840 $7,840 Less: Accumulated amortization Concession fees ................ 1,700 1,428 Other intangibles .............. 283 267 ------ ------ Net intangible assets ................. $5,857 $6,145 ====== ====== 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 38 SJW CORP. AND SUBSIDIAIRES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2003, 2002, and 2001 - (Continued) (Dollars in thousands, except share data) 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 ($27,300) of water, from SCVWD in the contract year ending June 30, 2004. 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 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. On April 11, 2003, VTA filed the eminent domain lawsuit. As a part of the proceedings, VTA has transferred funds from the escrow account into a court deposit account to secure its ongoing right of possession for construction of the light rail station pending final litigation. Compensation for the taking of property will be determined by the court or by way of settlement between SJW Land Company and VTA. This transaction will be recorded and it is expected to result in an increase to net income when the compensation issue is settled or a final court order is rendered. SJW Corp. is also subject to ordinary routine litigation incidental to its business. Other than as disclosed above, there are no other pending legal proceedings to which the Corporation or any of its subsidiaries is a party or to which any of its properties is the subject that are expected to have a material effect on the Corporation's financial position, results of operations or cashflows. The Corporation maintains a reserve for litigation and claims which had a balance of $648 and $609 as of December 31, 2003 and 2002, respectively. 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 $169, $147, and $165 in 2003, 2002, and 2001 respectively. 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 39 SJW CORP. AND SUBSIDIAIRES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2003, 2002, and 2001 - (Continued) (Dollars in thousands, except share data) Service LLC engages in the sale and rental of water conditioning equipment. SJW Corp. owns approximately 75% of the joint venture and has invested $75 and $287 in 2003 and 2002, respectively. The consolidated financial statements of SJW Corp. at December 31, 2003 and 2002 include the operating results of Crystal Choice Water Service LLC. Inter-company balances were eliminated. Minority interest in the losses of Crystal Choice Water Service LLC of $55, $87, and $121 was included in other losses in the Consolidated Statements of Income and Comprehensive Income at December 31, 2003, 2002, and 2001, respectively. Included in other noncurrent liabilities of SJW Corp.'s Balance Sheet is minority interest of $157 and $187 at December 31, 2003 and 2002, respectively. 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. The Pension Plan is administered by a Committee that is composed of an equal number of company and Union representatives. Investment decisions have been delegated by the Committee to an Investment Manager, presently U.S. Trust. Investment guidelines provided to the Investment Manager require that at least 30% of plan assets be invested in bonds or cash. Furthermore, equities are to be diversified by industry groups and selected to achieve preservation of capital coupled with long-term growth through capital appreciation and income. Additionally, Prudential Securities Inc. has been retained by the Committee as an advisor to monitor the performance of the Investment Manager based on written plan performance goals and criteria. Generally it is expected of the Investment Manager that the performance of the Pension Plan Fund, computed on a total annual rate of return basis, should meet or exceed specific performance standards over a five-year period and/or full market cycle. These standards include a specific rate of return, a return of four percent in excess of inflation and performance better than a similarly balanced fund using Standard and Poor 500 and Salomon Bros. Indexes. Satisfactory performance will also be achieved if the total return compared to an appropriate balanced fund universe is: a. in rising markets: in the second quartile of the universe b. declining markets: in the first quartile of the universe c. full market cycle: in the first quartile of the universe General restrictions have been placed on the Investment Manager. He may not acquire any security subject to any restriction: write, or sell any put, naked call or call option; acquire any security on margin; or otherwise utilize borrowed funds for the acquisition of any security; sell any security not owned by the Fund; acquire more than 10% of any class of securities or any single issuer; generally, acquire a security of any single issuer whose cost exceeds 6% of the fund value; securities of the San Jose Water Company; trade in commodities; or acquire foreign stocks except those traded as American depository receipts on a U.S. Stock Exchange. 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 $5,008, $4,583, and $5,399 as of December 31, 2003, 2002, and 2001, respectively, and net periodic pension cost of $583, $606, and $616 for 2003, 2002, and 2001, respectively. 40 SJW CORP. AND SUBSIDIAIRES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2003, 2002, and 2001 - (Continued) (Dollars in thousands, except share data) 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 $708, $671, and $639, in 2003, 2002, and 2001, 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 calculated utilizing the following assumptions:
Pension Benefits Other Benefits --------------------------------- ----------------------------------- 2003 2002 2001 2003 2002 2001 --------- --------- --------- ---------- ---------- --------- Weighted-Average Assumptions as of December 31 % % % % % % Discount rate .......................... 6.25 6.75 7.25 6.25 6.75 7.25 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. ---- ---- ---- ----- ----- ------
The 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 for actuarial expense calculation purposes. Both rates reflect the appropriate economic conditions at time of measurement. Net periodic cost for the defined benefit plans and other postretirement benefits was:
Pension Benefits Other Benefits --------------------------------------- -------------------------------- 2003 2002 2001 2003 2002 2001 ----------- ----------- ----------- -------- -------- ---------- Components of Net Periodic Benefit Cost Service cost ............................. $ 1,413 $ 1,148 926 $ 46 41 40 Interest cost ............................ 2,741 2,640 2,421 122 118 118 Expected return on assets ................ (2,191) (2,659) (2,940) (41) (40) (33) Amortization of transition obligation .... 56 54 3 56 56 56 Amortization of prior service cost ....... 286 354 258 16 16 16 Recognized actuarial loss/(gain) ......... 412 57 (346) - - (6) -------- -------- ------ ----- --- --- Net periodic benefit cost ................ $ 2,717 1,594 322 $ 199 191 191 ======== ======== ====== ===== === ===
41 SJW CORP. AND SUBSIDIAIRES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2003, 2002, and 2001 - (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 ------------------------------------- ------------------------------------ 2003 2002 2001 2003 2002 2001 ------------- ----------- ----------- ------------ ----------- ----------- Change in Benefit Obligation Benefit obligation at beginning of year ......... $ 41,466 37,021 36,385 $ 1,821 1,709 1,569 Service cost .................................... 1,413 1,148 926 46 41 40 Interest cost ................................... 2,741 2,640 2,421 122 118 118 Amendments ...................................... - 424 1,275 1,711 - - Actuarial loss/(gain) ........................... 3,516 1,931 (2,019) 152 66 101 Benefits paid ................................... (1,857) (1,698) (1,967) (113) (113) (119) --------- ------ ------ -------- ----- ----- Benefit obligation at end of year ............... $ 47,279 41,466 37,021 $ 3,739 1,821 1,709 ========= ====== ====== ======== ===== ===== Change in Plan Assets Fair value of assets at beginning of year; Debt securities ............................... $ 8,653 9,488 9,873 - - - 31.1% 27.9% 26.4% - - - Equity securities ............................. $ 16,461 23,682 25,979 - - - 59.1% 69.6% 69.4% - - - Cash & Equivalents ............................ $ 2,718 840 1,570 $ 507 394 483 9.8% 2.5% 4.2% 100% 100% 100% --------- ------ ------ -------- ----- ----- $ 27,832 34,010 37,422 $ 507 394 483 Actual return on plan assets .................... 4,344 (4,713) (1,766) - 7 18 Employer contributions .......................... 2,000 233 321 114 206 - Benefits paid ................................... (1,843) (1,698) (1,967) (100) (100) (107) --------- ------ ------ -------- ----- ----- $ 32,333 27,832 34,010 521 507 394 ========= ====== ====== ======== ===== ===== Fair value of assets at end of year; Debt securities ............................... $ 7,116 8,653 9,488 - - - 22.0% 31.1% 27.9% - - - Equity securities ............................. $ 21,677 16,461 23,682 - - - 67.0% 59.1% 69.6% - - - Cash & Equivalents ............................ $ 3,540 2,718 840 $ 521 507 394 11.0% 9.8% 2.5% 100% 100% 100% --------- ------ ------ -------- ----- ----- Total ......................................... $ 32,333 27,832 34,010 $ 521 507 394 ========= ====== ====== ======== ===== ===== Funded Status Plan assets less benefit obligation ............. $ (15,047) (13,633) (3,010) $ (3,218) (1,313) (1,315) Unrecognized transition obligation .............. 96 152 206 453 509 565 Unamortized prior service cost .................. 1,985 2,270 3,387 1,735 39 54 Unrecognized actuarial(gain) loss ............... 10,665 9,388 (1,045) 229 20 (94) --------- ------- ------ -------- ------ ------ Accrued benefit cost ............................ $ (2,301) (1,823) (462) $ (801) (745) (790) ========= ======= ====== ======== ====== ======
In 2004, the company expects to make a contribution of $1,341 and $114 to the pension plan and other post retirement benefit plan, respectively. 42 SJW CORP. AND SUBSIDIAIRES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2003, 2002, and 2001 - (Continued) (Dollars in thousands, except share data) Amounts recognized on the balance sheet consist of:
Pension Benefits Other Benefits ---------------------------------------- ---------------------------------- 2003 2002 2001 2003 2002 2001 ------------ ----------- ----------- ---------- --------- --------- Accrued benefit costs .................... $ (2,301) (1,823) (462) $ (801) (745) (790) Additional minimum liability ............. (4,874) (4,541) (2,580) - - - Intangible asset ......................... 2,080 2,423 1,001 - - - Accumulated other comprehensive loss ..... 2,794 2,118 1,579 - - - -------- ------ ------ ------ ---- ---- Net amount recognized .................... $ (2,301) (1,823) (462) $ (801) (745) (790) ======== ====== ====== ====== ==== ====
In December 2003, federal legislation was passed reforming Medicare and introducing the Medicare Part D prescription drug program. San Jose Water Company has not yet determined the effects, if any, the new legislation will have on its post retirement benefit plan or calculation that are required under SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions", as disclosed in this Note. The legislation may provide a special subsidy to San Jose Water Company which may affect the actuarial assumptions used in determining the utilization rates and medical cost trends. In addition, the FASB may take further action that could affect the accounting treatment of the legislation. Note 12. Long-Term Incentive Plan and Stock-Based Compensation On April 29, 2003, SJW Corp.'s shareholders executed and approved a technical amendment to its Long-Term Incentive Plan (Incentive Plan), which was originally adopted on April 18, 2002. Under the Incentive Plan, 900,000 common shares have been reserved for issuance. The amendment to the Incentive Plan includes allowing non-employee directors to receive awards, authorizing the plan administrator to grant stock appreciation rights, and listing of the performance criteria for performance shares. The amended plan allows SJW Corp. to provide key employees, including officers, and non-employee directors, the opportunity to acquire a meaningful equity interest in the Corporation. 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 300,000 common shares. 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, 2003, no securities were issued pursuant to the equity awards made and 127,407 shares will be issued upon the exercise of outstanding options and deferred restricted stock. The remaining shares available for issuance under the Incentive Plan are 772,593. The total compensation cost charged to income under all plans was $492 for 2003. The total benefits, including non-employee directors converted post-retirement benefits, recorded in shareholders' equity under all plans were $1,018. No awards were granted under the Incentive Plan in 2002 and 2001. Stock Options Awards in the form of stock option agreements under the Incentive Plan allow executives to purchase common shares at a specified price. Options are granted at an exercise price that is not less than the per share market price on the date of grant. The options vest at a 25% rate on their anniversary date over their first four years and are exercisable over a ten-year period. At December 31, 2003, 28,929 options were issued and outstanding under the Incentive Plan at an exercise price of $28.00, with a weighted average remaining life of 9.3 years, and the weighted average fair value of $5.33, at the date of grant. SJW Corp. has adopted Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", utilizing the Black-Scholes option-pricing model to compute the fair value of options at the grant date as a basis for determining stock-based compensation costs for financial reporting purposes. The assumptions utilized include: expected dividend yield - 3.4%, expected volatility - 27%, risk-free interest rate - 2.86%, expected holding period - five years. 43 SJW CORP. AND SUBSIDIAIRES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2003, 2002, and 2001 - (Continued) (Dollars in thousands, except share data) For the year ended December 31, 2003, the Corporation has recognized stock compensation expense of $26, for the 28,929 options granted to its executives. No options were granted in 2002 and 2001. Stock Options
2003 ------------------------------- Weighted-Average Shares Exercise Price ----------- ----------------- Outstanding at beginning of year .................... - - Granted ............................................. 28,929 $ 28.00 Exercised ........................................... - - Forfeited ........................................... - - Outstanding at end of year .......................... 28,929 $ 28.00 Options exercisable at year-end ..................... - - Weighted-average fair value of options granted during the year ........................................... $ 5.33 -
Options Exercisable
Options Outstanding Options Exercisable - --------------------------------------------------------- ------------------------- Weighted Average Remaining Weighted Weighted Range of Number Contractual Average Number Average Exercise Outstanding Life Exercise Exercisable Exercise Prices at 12/31/03 (years) Price at 12/31/03 Price - ------------ ------------- ------------- ---------- ------------- --------- $ 28.00 28,929 9.3 $ 28.00 - -
Deferred Restricted Stock Plans As of December 31, 2003, 41,670 restricted stock units have been granted to a key employee of the Corporation, which vest over a period of three years and are payable upon retirement. Following SFAS No. 123, the restricted stock units were valued at the market price of $28.10 per share at the date of grant, which is being recognized as compensation expense over the vesting period. For the year ended December 31, 2003, the Corporation has recognized stock compensation expense of $234 related to these restricted stock units. SJW Corp. has a Deferred Restricted Stock Program for non-employee Board members whereby members can elect to receive their existing and future cash pension benefit, and annual retainer fees in restricted stock units under the program. Directors who elect to participate in the program will receive an annual grant of the right to receive Deferred Restricted Stock in lieu of receiving a cash pension benefit, an amount equivalent to the annual retainer fee, upon retirement. The number of shares of each annual Deferred Restricted Stock award will equal to the amount of the aggregate annual retainer, as of the date of grant, divided by the fair market value of one share of the Corporation's common stock on the date of grant. Directors can receive a maximum number of ten awards for ten full years of service. With respect to the conversion of existing pension benefits that were accrued before the grant date, 20,487 shares were fully vested at the time of grant and the remaining 35,037 shares vest over a period of three years. As of December 31, 2003, 55,524 shares have been granted to the directors under the program at a market price of $28.40 per share. In accordance with SFAS No. 123, the Corporation has recognized stock compensation expense of $141 for the year ended December 31, 2003. Directors who elect to convert the annual retainer fee receive Deferred Restricted Stock in an amount equal to the annual retainer fee divided by the fair market value of one share of common stock 44 SJW CORP. AND SUBSIDIAIRES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2003, 2002, and 2001 - (Continued) (Dollars in thousands, except share data) on the last business day before the date of grant, which will vest on a monthly basis. For the year ended December 31, 2003 the Corporation has granted 428 deferred restricted shares in lieu of cash retainer fees at $28.07 and recognized stock compensation expense of $36. No Deferred Restricted Stock was granted in 2002 and 2001. Deferred Restricted Shares Outstanding Weighted Average Issue Price Shares -------------- --------- Outstanding at 12/31/2002 ......... - - Issued ..................... $ 28.27 98,478 Forfeited .................. - - Outstanding at 12/31/2003 ......... $ 28.27 98,478 Shares vested ..................... - 35,661 Dividend Equivalent Rights SJW Corp. also has a Dividend Equivalent Rights Agreement providing holders of options to receive dividend rights each time a dividend is paid on common shares after the option grant date, for a maximum period of four years. Dividend Equivalent Rights for restricted stock units allow holders of restricted stock units to receive dividend rights, each time a dividend is paid on common shares after the grant date, until the stock is issued to the holder. The accumulated dividends of the holders will be used to purchase stock units on behalf of the holders at the beginning of the following year using the average fair market value of common shares on each of the dividend dates in the immediately preceding year. The dividend equivalent units shall be vested in the same manner as the options and restricted stock. For the year ended December 31, 2003, the Corporation has recognized compensation expense for dividend rights of $55. Note 13. Sale of Nonutility Property On March 11, 2003, SJW Corp. sold San Tomas station, a nonutility property, to Santa Clara Valley Water District (SCVWD) for a contract price of $5,400. SJW Corp. recognized a gain on sale of nonutility property of $3,030, net of tax of $2,106 in connection with the sale. In April 2003, the Corporation reinvested the property sale proceeds by acquiring two income properties in the states of Connecticut and Florida, at a total purchase price of $15,400. In connection with the purchases, the Corporation executed mortgages in the amount of $9,900. The mortgage loans are due in ten years with a fixed interest rate of 5.96%. The mortgages are secured by the same properties that SJW Corp. has purchased in the states of Connecticut and Florida. Note 14. Subsequent events On January 29, 2004, SJW Corp.'s Board of Directors approved a three-for-one stock split of common stock for shareholders of record on February 10, 2004 and the issued shares were split on a three-for-one basis on March 1, 2004. Share and per share computations provided herein reflect the changes in the number of shares due to the stock split. 45 SJW CORP. AND SUBSIDIAIRES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2003, 2002, and 2001 - (Continued) (Dollars in thousands, except share data) Note 15. Unaudited Quarterly Financial Data Summarized quarterly financial data is as follows:
2003 Quarter ended --------------------------------------------------- March June September December ------------ ---------- ----------- --------- Operating revenue ............ $ 27,791 37,968 49,334 34,639 Operating income ............. 3,976 6,256 7,887 4,835 Net income ................... 5,282 4,426 5,967 3,002 Comprehensive income ......... 6,645 5,964 4,468 3,635 Earnings per share - Basic ................... 0.58 0.48 0.65 0.33 - Diluted ................. 0.58 0.48 0.65 0.33 Comprehensive income per share - Basic ................... 0.73 0.65 0.49 0.40 - Diluted ................. 0.72 0.65 0.49 0.40 Market price range of stock: High ...................... 28.08 29.15 29.42 29.90 Low ....................... 25.13 25.65 27.25 28.47 Dividends per share .......... 0.25 0.24 0.24 0.24
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 Earnings per share - Basic ................... 0.19 0.44 0.63 0.30 - Diluted ................. 0.19 0.44 0.63 0.30 Comprehensive income per share - Basic ................... 0.18 0.41 0.66 0.13 - Diluted ................. 0.18 0.41 0.66 0.13 Market price range of stock: High ...................... 29.67 29.40 27.13 27.95 Low ....................... 26.08 25.68 25.67 25.93 Dividends per share .......... 0.23 0.23 0.23 0.23
46 SJW CORP. FINANCIAL STATEMENT SCHEDULE Schedule II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Years ended December 31, 2003 and 2002 Description 2003 2002 - ----------------------------------------------- ------------- ------------- Allowance for doubtful accounts Balance, beginning of period ............... $ 120,000 100,000 Charged to expense ......................... 307,628 397,860 Accounts written off ....................... (344,231) (405,030) Recoveries of accounts written off ......... 46,603 27,170 ---------- -------- Balance, end of period ..................... $ 130,000 120,000 ========== ======== Reserve for litigation and claims Balance, beginning of period ............... $ 609,292 579,698 Charged to expense ......................... 105,000 90,000 Payments ................................... (66,067) (60,406) ---------- -------- Balance, end of period ..................... $ 648,225 609,292 ========== ======== Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures (a) The Corporation's management, with the participation of the Corporation's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Corporation's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures (as defined in Rules 13(a)-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Corporation in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The Corporation believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. (b) Changes in internal controls. There has been no change in internal control over financial reporting during the fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect the internal controls over financial reporting of SJW Corp. 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 2004 Annual Meeting of Shareholders to be held on April 29, 2004 (the "2004 Proxy Statement") under the captions "Proposal 1 - Election of Directors", "Section 16(a) Beneficial Ownership Reporting Compliance," and "Corporate Governance and Board Matters" and is incorporated herein by reference. 47 Code of Ethics SJW Corp. has adopted a code of ethics that applies to SJW Corp.'s Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. The text of the code of ethics is posted on SJW Corp.'s internet website under web address http://www.sjwater.com. SJW Corp. intends to satisfy the disclosure requirements under Item 10 of Form 8-K regarding an amendment to, or a waiver from, a provision of its code of ethics by posting such information on its website. Item 11. Executive Compensation The information required by this item is contained in the 2004 Proxy Statement under the captions "Compensation of Directors," "Executive Compensation," "Employment 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 2004 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 2004 Proxy Statement under the caption "Certain Relationships and Related Transactions," and is incorporated herein by reference. PART IV Item 14. Prinicipal Accountant Fees and Services The information required by this item is contained in the 2004 Proxy Statement under the caption "Principal Accountant Fees and Services" and is incorporated herein by reference. Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (1) Financial Statements
Page ----- Independent Auditors' Report ..................................................... 27 Consolidated Balance Sheets as of December 31, 2003 and 2002 ..................... 28 Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2003, 2002, and 2001 ............................................... 29 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2003, 2002, and 2001 ............................................... 30 Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001 ........................................................................ 31 Notes to Consolidated Financial Statements ....................................... 32
(2) Financial Statement Schedule
Schedule Number II - --------- Valuation and Qualifying Accounts and Reserves, Years ended December 31, 2003 and 2002 ........................................... 47
All other schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. 48 (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. SJW Corp. filed a current report on Form 8-K with the Securities and Exchange Commission on October 29, 2003 to furnish its press release that announced the financial results for the third quarter ended September 30, 2003 under Item 12 thereof. 49 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.(1) 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. 10.3 San Jose Water Company Executive Supplemental Retirement Plan adopted by San Jose Water Company Board of Directors.(2) 10.4 First Amendment to San Jose Water Company Executive Supplemental Retirement Plan adopted by San Jose Water Company Board of Directors.(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) 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 Form 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 Form 10-Q for the period ending September 30, 1999. S.E.C. File No. 1-8966.(2)
50
Exhibit No. Description - ---------- ------------------------------------------------------------------------------------- 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 Form 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 Form 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 Form 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 Form 10-Q for the period ending September 30, 1999. S.E.C. File No. 1-8966. 10.18 San Jose Water Company Executive Supplemental Retirement Plan adopted by San Jose Water Company Board of Directors, as restated to reflect amendments made through May 1, 2003. Filed as an Exhibit to Form 10-Q for the period ended June 30, 2003. S.E.C. File No. 1-8966.(2) 10.19 SJW Corp. Executive Severance Plan adopted by SJW Corp. Board of Directors, as restated to reflect amendments made through May 1, 2003. Filed as an Exhibit to Form 10-Q for the period ended June 30, 2003. S.E.C. File No. 1-8966.(2) 10.20 SJW Corp. Long-Term Incentive Plan, adopted by SJW Corp. Board of Directors, as amended on March 3, 2003. Filed as an Exhibit to Form 10-Q for the period ended June 30, 2003. S.E.C. File No. 1-8966.(2) 10.21 Chief Executive Officer Employment Agreement, as restated on June 27, 2003. Filed as an Exhibit to Form 10-Q for the period ended June 30, 2003. S.E.C. File No. 1-8966.(2) 10.22 Standard Form of Stock Option Agreement-subject to changes per Employment Agreement, as adopted by the SJW Corp. Board of Directors on April 29, 2003. Filed as an Exhibit to Form 10-Q for the period ended June 30, 2003. S.E.C. File No. 1-8966.(2) 10.23 Chief Executive Officer SERP Deferred Restricted Stock Award, as restated on June 27, 2003. Filed as an Exhibit to Form 10-Q for the period ended June 30, 2003. S.E.C. File No. 1-8966.(2) 10.24 Form of Stock Option Agreement with Dividend Equivalent Agreement as adopted by the Board of Directors on April 29, 2003. Filed as an Exhibit to Form 10-Q for the period ended June 30, 2003. S.E.C. File No. 1-8966.(2) 10.25 Form of Directors Deferred Restricted Stock Program as adopted by SJW Corp. Board of Directors on July 29, 2003. Filed as an Exhibit to Form 10-Q for the period ending September 30, 2003. S.E.C. File No. 1-8966.(2) 10.26 Form of Directors Annual Retainer Fee Deferred Election Agreement, as adopted by SJW Corp. Board of Directors on July 29, 2003. Filed as an Exhibit to Form 10-Q for the period ending September 30, 2003. S.E.C. File No. 1-8966.(2)
51
Exhibit No. Description - -------- -------------------------------------------------------------------------------------- 31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a) by President and Chief Executive Officer.(1) 31.2 Certification Pursuant to Rule 13a-14(a)/15d-14(a) by Chief Financial Officer and Treasurer.(1) 32.1 Certification Pursuant to 18 U.S.C. Section 1350 by President and Chief Executive Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1) 32.2 Certification Pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer and Treasurer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)
- ------------ (1) Filed currently herewith. (2) Management contract or compensatory plan or agreement. 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. 52 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, 2004 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, 2004 By /s/ W. RICHARD ROTH ---------------------------------- W. Richard Roth, President, Chief Executive Officer and Member, Board of Directors Date: January 29, 2004 By /s/ ANGELA YIP ---------------------------------- Angela Yip, Chief Financial Officer Date: January 29, 2004 By /s/ VICTOR K. WONG ---------------------------------- Victor K. Wong, Controller (Chief Accounting Officer) Date: January 29, 2004 By /s/ MARK L. CALI ---------------------------------- Mark L. Cali, Member, Board of Directors Date: January 29, 2004 By /s/ J. PHILIP DINAPOLI ---------------------------------- J. Philip Dinapoli, Member, Board of Directors Date: January 29, 2004 By /s/ DREW GIBSON ---------------------------------- Drew Gibson, Member, Board of Directors Date: January 29, 2004 By /s/ RONALD R. JAMES ---------------------------------- Ronald R. James, Member, Board of Directors Date: January 29, 2004 By /s/ GEORGE E. MOSS ---------------------------------- George E. Moss, Member, Board of Directors 53 Date: January 29, 2004 By /s/ ROSCOE MOSS, JR. ---------------------------------- Roscoe Moss, JR., Member, Board of Directors Date: January 29, 2004 By /s/ CHARLES J.TOENISKOETTER ---------------------------------- Charles J. Toeniskoetter, Member, Board of Directors Date: January 29, 2004 By /s/ FREDERICK ULRICH ---------------------------------- Frederick Ulrich, Member, Board of Directors 54 EX-2.1 3 p18246_ex2-1.txt REGISTRATION RIGHTS AGREEMENT Exhibit 2.1 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of December __, 1992, among SJW CORP., a California corporation (the "Company"), and ROSCOE MOSS, JR. and GEORGE E. MOSS, each an individual (collectively, the "Principal Shareholders" and individually, a "Principal Shareholder"). This Agreement is made pursuant to the Stock Exchange Agreement dated as of August 20, 1992 (as amended October 21, 1992) by and among the Company, the Principal Shareholders, Roscoe Moss Company, a California corporation ("RMC") and the other RMC shareholders (the "Exchange Agreement"). To induce the Principal Shareholders to enter into the Exchange Agreement, the Company has agreed to provide the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Exchange Agreement. The parties hereto hereby agree as follows: 1. Definitions. 1.1 "Holder" or "Holders". The term "Holder" or "Holders" shall mean (i) the Principal Shareholders, for as long as they hold shares of Common Stock (as defined below) issued pursuant to the Exchange Agreement, and (ii) a transferee or transferees of any of such Common Stock entitled to the benefits of this Agreement pursuant to Section 7 below. 1.2 "Common Stock". The term "Common Stock" shall mean the Company's common stock, par value $3.125 per share. 1.3 "Registrable Securities". The term "Registrable Securities" shall mean (i) the Common Stock issued pursuant to the Exchange Agreement and (ii) any other equity securities of the Company issued in exchange for any such Common Stock (including upon recapitalizations) which cannot be publicly resold by the Holder thereof without restriction except pursuant to registration under the Securities Act of 1933, as amended ("Securities Act"), or an available exemption thereunder. For the purposes of this Agreement, securities subject to this Agreement will cease to be Registrable Securities when (a) they have been registered under the Securities Act, the registration statement in connection therewith has been declared effective and they have been disposed of pursuant to such effective registration statement by the Holders, (b) they are distributed to the public pursuant to Rule 144 (or any similar provision then in force) under the Securities Act or (c) they have been otherwise transferred and new certificates or other evidences of ownership for them not bearing a restrictive legend and not subject to any stop transfer order or other restriction on transfer have been delivered by the Company in compliance with applicable securities laws. 2. Demand Registration. 2.1 Registration Rights. The Holders of Registrable Securities shall have the right upon the affirmative vote of at least 40% of the Registrable Securities to require that the Company register, using a registration statement in such form as is then available to the Company under the Securities Act, the Registrable Securities and the Company shall use its reasonable best efforts to have such Registrable Securities registered by the Company under the Securities Act. In addition, the Company shall be obligated to file and cause to become effective, when requested by any Holder or Holders and at such time as such registration is available, a registration statement in such form as is then available to the Company under the Securities Act, with respect to at least an aggregate of 85,000 shares of Registrable Securities. The managing underwriter of any offering pursuant to this Section 2.1, if any, shall be a nationally recognized investment banking firm selected by the affirmative vote of a majority of Registrable Securities held by participating Holders and reasonably acceptable to the Company. If, in the reasonable judgment of the managing underwriter, if any, the inclusion of all of the participating Holders' Registrable Securities would interfere with the successful marketing of a smaller offering, then the total number of Registrable Securities to be included in the registration statement shall be reduced pro rata among such participating Holders, based upon the dollar amount of Registrable Securities that each participating Holder had requested initially to be included in the offering, until the required level is obtained. 2.2 Terms and Conditions. All registrations pursuant to Section 2.1 shall be made in accordance with the following terms and conditions: (a) Notice. The participating Holders shall furnish to the Company written notice stating: (i) the number of Registrable Securities desired to be registered; (ii) the proposed plan of distribution for such securities; (iii) the approximate date on which such Holders desire the registration statement for such Registrable Securities to become effective; (b) Information to Be Provided by the Participating Holders. Each participating Holder shall furnish to the Company all information regarding both itself and the proposed plan of distribution which is required for inclusion in the registration statement; (c) Filing Under State Securities Laws. The Company shall effect all filings under state securities laws that any participating Holder may reasonably request and take such other action as any participating Holder may reasonably request to facilitate the offer and sale of the Registrable Securities; provided, that such action does not require the Company to register as a dealer in such state; (d) Expenses. The Company shall pay all reasonable fees, costs and expenses incurred in connection with all registration or qualification of Registrable Securities under the Securities Act and under state securities laws pursuant to Section 2.1, including, without limitation, all reasonable registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company, and reasonable fees and disbursements of one Special Counsel for the participating Holders ("Special Counsel"); provided, that the participating Holders shall bear their pro rata share of the underwriting discounts and commissions, if any, based upon their share of the total number of shares offered and that each participating Holder shall bear all fees and expenses of its own counsel, other than the Special Counsel, if any; (e) Number of Registrations. The Company shall be obligated to effect only one registration pursuant to Section 2.1 on Form S-1 or S-2 (or their equivalent successor forms) if such forms are then available to the Company under the Securities Act and shall be obligated to effect up to ten registrations pursuant to Section 2.1 on Form S-3 (or its equivalent successor form) if such form is then available to the Company under the Securities Act; provided, that the Company shall not be obligated to file a registration statement on Form S-3 within 180 days of the effective date of any prior registration statement on Form S-1, S-2 or S-3, and no more than three registration statements on Form S-3 per calendar year. If a registration statement fails to become effective pursuant to Section 2.1 for any reason other than a request for withdrawal by the participating Holders, then such registration shall not be counted as a demand registration pursuant to Section 2.2(e) herein; and (f) Exclusivity. The Company agrees that it shall not, except with the written consent of a majority of the participating Holders, include in any registration statement filed at the participating Holders' request any other offering or sale of shares by the Company or by the other shareholders of the Company if, in the reasonable judgment of the managing underwriter, if any, such inclusion would be materially prejudicial to the participating Holders' offering. If the Company or other shareholders of the Company do include, with the participating Holders' consent, the offering of their shares in any registration statement filed at the participating Holders' request, then all reasonable expenses relating to such registration shall be borne pro rata among the Company, the other shareholders and the participating Holders according to the number of shares offered by each participant; provided, that the Company shall pay all reasonable fees, costs and expenses of the participating Holders as required by Section 2.2(d). (g) Termination of Rights. Notwithstanding anything to the contrary contained in this Agreement, the registration rights set forth in this Section 2 shall terminate with respect to each Holder who may sell his Registrable Securities to the public without registration with the SEC (as defined below) and without volume limitations on such sale or sales. 3. Incidental Registration. 3.1 Reasonable Efforts Obligation. The Company agrees that each time it proposes to file a registration statement (other than a registration statement relating solely to the issuance of Company securities pursuant to employee benefit plans or the distribution of Company securities in a merger or acquisition) under the Securities Act for the proposed sale for cash of shares of its Common Stock on a form that would also permit the registration of the Registrable Securities, the Company shall use all reasonable efforts to cause the Registrable Securities to be included in such registration statement. 3.2 Terms and Conditions. All registrations pursuant to Section 3.1 shall be subject to the following terms and conditions: (a) Notice. The Company shall give to the Holders written notice of the proposed registration prior to filing. To participate in the registration, a Holder must notify the Company in writing within 20 days after receipt of the notice from the Company that such Holder desires to participate in the registration and indicate the number of Registrable Securities such Holder desires to sell; (b) Number of Shares. Each participating Holder agrees that the number of Registrable Securities which the participating Holders shall have the right to register, if any, shall be determined solely by the reasonable judgment of the managing underwriter, if any. If, in the reasonable judgment of the managing underwriter, if any, the inclusion of the participating Holders' Registrable Securities would interfere with the successful marketing of a smaller offering, then the total number of shares to be included in the registration statement shall be reduced to the required level as follows: (i) First, the number of shares held by all other holders of securities which have rights of incidental registration shall be reduced pro rata among such other holders until the required level is obtained; and (ii) Second, if the required level cannot be obtained even though all of the shares held by such other holders are eliminated from the offering, then the number of Registrable Securities held by the participating Holders shall be reduced pro rata among such participating Holders according to the percentage that the number of shares of Registrable Securities held by each participating Holder bears to the aggregate number of shares of Registrable Securities held by the participating Holders, until the required level is obtained. Those shares which are excluded from the registration statement shall be withheld from the market by the holders thereof for the period, not to exceed 120 days, which the managing underwriter, if any, reasonably determines to be necessary to effect the offering; provided, that the principal officers of the Company have also agreed to such restrictions; (c) Expenses. With respect to each inclusion of Registrable Securities in a registration statement pursuant to Section 3.1, all reasonable fees, costs and expenses of and incidental to such inclusion shall be borne by the Company; provided, that the participating Holders shall bear their pro rata share of the underwriting discounts and commissions, if any, and that each Holder shall bear the fees and expenses of its own counsel other than those of one Special counsel, which shall be borne by the Company; (d) Information to Be Furnished by the Participating Holders. The participating Holders shall furnish to the Company such information regarding the participating Holders and the proposed plan of distribution as is required to be included in the registration statement; and (e) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under Section 3.1 prior to the effectiveness of such registration whether or not the participating Holders have elected to include securities in such registration. (f) Termination of Rights. Notwithstanding anything to the contrary contained in this Agreement, the incidental registration rights set forth in this Section 3 shall terminate with respect to each Holder who may sell his Registrable Securities to the public without registration with the SEC (as defined below) and without volume limitations on such sale or sales. 4. Additional Registration Procedures. If, at any time and from time to time, the Company is required by the provisions of either Section 2.1 or 3.1 hereinabove to effect the registration of shares of Registrable Securities under the Securities Act, then the Company shall: 4.1 Filing of Registration Statement. Prepare and file with the Securities and Exchange Commission (the "SEC") the applicable registration statement with respect to the Registrable Securities and use its reasonable best efforts to cause such registration statement to become and remain effective until the Registrable Securities covered by such registration statement have been sold, and prepare and file with the SEC amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective until the Registrable Securities covered by such registration statement have been sold. 4.2 Underwriting Agreement. Enter into a written underwriting agreement in customary form and substance reasonably satisfactory to the Company and the managing underwriter or underwriters, if any, of the offering of the Registrable Securities. The Company acknowledges that such underwriting agreement may contain restrictions on the Company's ability to offer equity securities but in no event shall the Company be obligated to refrain from marketing its equity securities for longer than 120 days after the effective date of any registration statement filed by the Company. 4.3 Copies of Documents. Furnish to the participating Holders and to the underwriters of the securities being registered, if any, such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such Holders or underwriters may reasonably request. 4.4 Notice of Effectiveness. Notify the participating Holders, reasonably promptly after it shall receive notice thereof, of the time when such registration statement has become effective, or a supplement to any prospectus forming apart of such registration statement has been filed. 4.5 Notice of Amendments. Notify such Holders reasonably promptly of any request by the SEC for the amending or supplementing of such registration statement or prospectus or for the provision of additional information. 4.6 Filing of Amendments. Prepare and file reasonably promptly with the SEC, and notify reasonably promptly such Holders of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, the principal officers of the Company are on notice that any event has occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of fact or omit to state any fact necessary to make the statements therein not misleading in light of the circumstances in which they were made. 4.7 Amendment of Prospectus. If, within 150 days of the effectiveness of the applicable registration statement, any such Holder or underwriter for any such Holder, if any, is required to deliver a prospectus at a time when the prospectus then in effect may no longer be used under the Securities Act, then prepare reasonably promptly upon written request such amendment or amendments to such registration statement and such prospectus or prospectuses as may be necessary to permit compliance with the requirements of the Securities Act. 4.8 Notice of Stop Orders. Advise such Holders reasonably promptly after it receives notice or obtains knowledge thereof, of the issuance of any stop order by the SEC suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose and reasonably promptly use its reasonable best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued. 4.9 Opinion of Counsel and Accountant's Letter. At the reasonable request of any such Holder, furnish on the effective date of the registration statement and, if such registration includes an underwritten public offering, at the closing provided for in the underwriting: (i) an opinion of the counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the Holders making such request, covering such matters with respect to the registration statement, the prospectus and each amendment or supplement thereto, proceedings under state and federal securities laws, other matters relating to the Company, the securities being registered, and the offer and sale of such securities as are customarily the subject of opinions of issuer's counsel provided to underwriters in underwritten public offerings; and (ii) a letter dated as of each such date, from the independent certified public accountants of the Company, addressed to the underwriters, if any, and to the Holders making such request, stating that they are independent certified public accountants within the meaning of the Securities Act and that in the opinion of such accountants the financial statements and other financial data of the Company included in the registration statement, the prospectus or any amendment or supplement thereto comply in all respects with the applicable accounting requirements of the Securities Act, and additionally covering such other financial matters, including, without limitation, information as to the period ending not more than five calendar days prior to the date of such letter with respect to the registration statement and prospectus, as the underwriters, if any, or such requesting Holders may reasonably request. 4.10 Objectionable Amendments. Not file any amendment or supplement to each registration statement or prospectus to which a majority of such Holders has reasonably objected on the grounds that such amendment or supplement does not comply in all respects with the requirements of the Securities Act or the rules and regulations there under, having been furnished with a copy thereof prior to the filing thereof. 5. Indemnification 5.1 Indemnification by Company. The Company shall indemnify and hold harmless the Holders, any underwriter (as defined in the Securities Act) for the Holders, and each person who controls any Holder or any underwriter for any Holder within the meaning of the Securities Act, from and against, and shall reimburse such persons with respect to, any and all losses, damages, liabilities, costs or expenses to which they may become subject under the Securities Act, or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any fact by the Company contained in any registration statement filed pursuant to the provisions of this Agreement, any prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission by the Company to state therein a fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, that the Company shall not be liable in any such case to the extent that any such losses, damages, liabilities, costs or expenses arise out of or are based upon an untrue statement or alleged untrue statement or omission or alleged omission by the Company so made in strict conformity with information furnished by the Holders or any such underwriter in writing specifically for use in the preparation thereof; provided, that the indemnity contained in this Section 5.1 shall not apply to amounts paid in settlement of any such losses, damages, liabilities, costs or expenses if such settlement is effected without the consent of the Company. 5.2 Indemnification by Holder. Each Holder, severally but not jointly, shall indemnify and hold harmless the Company from and against, and shall reimburse the Company, any underwriter for the Company and any person who controls the Company or any such underwriter with respect to, any and all losses, damages, liabilities, costs or expenses to which the Company may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any fact contained in any registration statement filed pursuant to the provisions of this Agreement, any prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein, in light of the circumstances in which they were made, not misleading; in each case to the extent, but only to the extent, that such untrue statement, or alleged untrue statement, or omission, or alleged omission, was so made in reliance upon and in strict conformity with written information furnished by such Holder specifically for use in the preparation thereof; provided, that the indemnity contained in this Section 5.2 shall not apply to amounts paid in settlement of any such losses, damages, liabilities, costs or expenses if such settlement is effected without the consent of such Holder. 5.3 Conduct of Indemnification Proceedings. Reasonably promptly after receipt by an indemnified party of notice, pursuant to the provisions of Sections 5.1 and 5.2, of the commencement of any action involving the subject matter of the foregoing indemnity provisions, such indemnified party shall, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of Sections 5.1 and 5.2, notify the indemnifying party of the commencement thereof, but the omission to notify the indemnifying party shall not relieve it from any liability it may have to any indemnified party thereunder. If such action is brought against any indemnified party and it notifies the then indemnifying party of the commencement thereof, then the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party pursuant to the provisions of Section 5.1 or 5.2, as applicable, for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, other than reasonable costs of investigation. 6. Reporting Requirements Under the Securities Exchange Act of 1934. The Company shall timely file such information, documents and reports as the SEC may require or prescribe under either Section 13 or 15(d) (whichever is applicable) of the Securities Exchange Act of 1934, as amended ("Exchange Act"). The Company shall thereafter, whenever reasonably requested by any Holder, notify such Holder in writing whether the Company's has, as of the date specified by such Holder, complied with the Exchange Act reporting requirements to which it is subject for a period prior to such date as shall be specified by such Holder. The Company acknowledges and agrees that the purposes of the requirements contained in this Section 6 are: (i) to enable any such Holder to comply with the current public information requirement contained in Paragraph (b) of Rule 144 under the Securities Act should such Holder ever wish to dispose of any of the securities of the Company acquired by it without registration under the Securities Act in reliance upon Rule 144 (or any equivalent successor provision); and (ii) to qualify the Company for the use of registration statements on Form S-3, or its equivalent successor form, with respect to secondary distributions. In addition, the Company shall take such other reasonable measures and file such other information, documents, and reports as shall hereafter be required by the SEC as a condition to the availability of Rule 144 under the Securities Act (or any equivalent successor provision). 7. Transferees. The rights contained in this Agreement shall inure to the benefit of any transferee of a Holder receiving a number of shares of such Holders' Registrable Securities equal to or greater than ten percent of the Company's then outstanding shares of Common Stock; provided, that (a) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee and the Registrable Securities with respect to which such registration rights are being transferred as well as a copy of a duly executed written instrument in form reasonably satisfactory to the Company by which such transferee assumes all of the obligations and liabilities of its transferor hereunder and under the Affiliate Agreement of such transferor referred to in the Exchange Agreement and agrees to be bound hereunder and thereunder; and (b) immediately following such transfer disposition of such Registrable Securities by the transferee is restricted under the Securities Act. 8. Stand-Off Agreement. The Holders shall refrain from making any public sale or distribution of the Company's equity securities during the period commencing 7 days prior to, and expiring 120 days after, a registration statement has become effective, if, but only if, the managing underwriter or underwriters, if any, determine it necessary in order to effect the offering and the Company's principal officers are subject to the same restrictions. 9. Miscellaneous. 9.1 No Inconsistent Agreements. The Company will not hereafter enter into any agreement with respect to its securities which materially adversely affects the rights granted to the Holders of Registrable Securities in this Agreement. The Company has not previously entered into any agreement with respect to any of its equity securities granting any registration rights to any person. 9.2 Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has agreed in writing thereto and has obtained the written consent of Holders of at least a majority of the Registrable Securities then outstanding and the written consent of the parties hereto. Notwithstanding the foregoing, the addition of additional parties hereto as "Holders" pursuant to Section 1.1 above shall not constitute an amendment, modification or supplement hereof. 9.3 Notices. All notices, requests, demands and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given (i) upon receipt, if delivered personally, (ii) upon confirmation of receipt, if given by electronic facsimile and (iii) on the third business day following mailing, if mailed first-class, postage prepaid, registered or certified mail as follows: If to the Company: SJW Corp. 374 West Santa Clara Street San Jose, CA 95196 Telecopier No.:(408) 279-7934 Attn: W .R. Roth, Chief Financial Officer and Treasurer With a copy to: Brobeck, Phleger & Harrison One Market Plaza Spear Street Tower San Francisco, CA 94105 Telecopier No.: (415) 442-1010 Attn: Ronald B. Moskowitz, Esq. If to the Shareholders: Roscoe Moss, Jr. George E. Moss c/o Roscoe Moss Company 4360 Worth Street Los Angeles, CA 90063 Telecopier No.: (213) 263-4497 With a copy to: Sheppard, Mullin, Richter & Hampton 333 South Hope Street, 48th Floor Los Angeles, CA 90071 Telecopier No.: (213) 620-1398 Attn: John D. Hussey, Esq. Any party may, by notice given to the other parties in accordance with this Section 9.4, designate another address, telecopier number or person for receipt of notice under this Agreement. 9.4 Successors and Assigns. Except as otherwise provided herein, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties. 9.5 Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 9.6 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 9.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to be performed wholly within that State without regard to principles of conflicts of law. 9.8 Severability. In the event that anyone or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and the remaining provisions contained herein shall not be affected or impaired thereby. 9.9 Entire Agreement. This Agreement, together with the Exchange Agreement, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the, agreement and understanding of the parties hereto in respect of the subject matter contained herein. This Agreement, together with the Exchange Agreement, supersedes all prior agreements and understandings between the parties with respect to such subject matter. 9.10 Attorneys' Fees. In any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof or thereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. SJW CORP. By: ------------------------------ Title By: ------------------------------ Roscoe Moss, Jr. By: ------------------------------ George E. Moss EX-31.1 4 p18246_ex31-1.txt CERTIFICATIONS 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 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 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 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, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; c) evaluated the effectiveness of the registrant's disclosure controls and procedures presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 12, 2004 /s/ W. RICHARD ROTH ------------------------------------- W. Richard Roth President and Chief Executive Officer (Principal executive officer) 55 EX-31.2 5 p18246_ex31-2.txt CERTIFICATIONS 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 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 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 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, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; c) evaluated the effectiveness of the registrant's disclosure controls and procedures presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 12, 2004 /s/ ANGELA YIP ------------------------------------- Angela Yip Chief Financial Officer and Treasurer (Principal financial officer) 56 EX-32.1 6 p18246_ex32-1.txt CERTIFICATION OF ROTH Exhibit 32.1 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, 2003 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 (Principal executive officer) March 12, 2004 EX-32.2 7 p18246_ex32-2.txt CERTIFICATION OF YIP Exhibit 32.2 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, 2003 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 (Principal financial officer) March 12, 2004 -----END PRIVACY-ENHANCED MESSAGE-----