Form 10-K
Table of Contents

 

 

UNITED STATES

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, 2008

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      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 incorporation or organization)   (I.R.S. Employer Identification No.)

110 West Taylor Street, San Jose,

California

  95110
(Address of principal executive offices)   (Zip Code)

408-279-7800

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

  

Name of each exchange on which registered

Common Stock, $0.521 par value per share

   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨     No  x

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 the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨    Accelerated filer  x     Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of June 30, 2008, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $402,116,088 based on the closing sale price as reported on the New York Stock Exchange.

Indicate the number of shares outstanding of registrant’s common stock, as of the latest practicable date.

 

Class

  

Outstanding at February 9, 2009

Common Stock, $0.521 par value per share

   18,464,692

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement relating to the registrant’s Annual Meeting of Shareholders, to be held on May 6, 2009, are incorporated by reference into Part III of this Form 10-K where indicated.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page
PART I

Forward-Looking Statements

   3

Item 1.

  

Business

   3

Item 1A.

  

Risk Factors

   9

Item 1B.

  

Unresolved Staff Comments

   15

Item 2.

  

Properties

   15

Item 3.

  

Legal Proceedings

   16

Item 4.

  

Submission of Matters to a Vote of Security Holders

   16
PART II

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   17

Item 6.

  

Selected Financial Data

   19

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   20

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   34

Item 8.

  

Financial Statements and Supplementary Data

   35

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   67

Item 9A.

  

Controls and Procedures

   67

Item 9B.

  

Other Information

   68
PART III

Item 10.

  

Directors, Executive Officers and Corporate Governance

   68

Item 11.

  

Executive Compensation

   69

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   69

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

   69

Item 14.

  

Principal Accountant Fees and Services

   69
PART IV

Item 15.

  

Exhibits and Financial Statement Schedules

   70

Exhibit Index

   71

Signatures

   74


Table of Contents

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 SJW Corp. and 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”, “may”, “should”, “will”, 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 Item 1A, “Risk Factors,” and 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 (the “SEC”), specifically the most recent reports on Form 10-Q and Form 8-K filed with the SEC, 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

General Development of Business

SJW Corp. was incorporated in California on February 8, 1985. SJW Corp. is a holding company with three subsidiaries:

 

   

San Jose Water Company, a wholly owned subsidiary of SJW Corp., with its headquarters located at 110 West Taylor Street in San Jose, California 95110, was originally incorporated under the laws of the State of California in 1866. As part of a reorganization on February 8, 1985, San Jose Water Company became a wholly owned subsidiary of SJW Corp. San Jose Water Company is a public utility in the business of providing water service to approximately 226,000 connections that serve a population of approximately one million people in an area comprising approximately 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 of SJW Corp., was incorporated in 1985. SJW Land Company owns undeveloped land in the states of California and Tennessee, owns and operates commercial buildings in the states of California, Florida, Connecticut, Texas, Arizona and Tennessee, and has a 70% limited partnership interest in 444 West Santa Clara Street, L.P.

 

   

SJWTX, Inc., doing business as Canyon Lake Water Service Company (“CLWSC”), a wholly owned subsidiary of SJW Corp., was incorporated in September 2005. CLWSC provides service to approximately 8,700 connections that serve approximately 36,000 residents in a service area comprising more than 153 square miles in the growing region between San Antonio and Austin, Texas, as of December 31, 2008.

SJW Corp. also owns 1,099,952 shares of California Water Service Group, which represents approximately 5% of that company’s outstanding shares as of December 31, 2008 and it is accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” as an available-for-sale marketable security.

On January 31, 2007, the rental equipment and existing inventory of Crystal Choice Water Service LLC, a 75% owned subsidiary engaged in the sale and rental of water conditioning and purification equipment, was sold for $635,000. Crystal Choice Water Service LLC was liquidated in August 2007.

 

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Together, San Jose Water Company and CLWSC are referred to as “Water Utility Services.”

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 that affect San Jose Water Company’s business: general rate increases and offset rate increases. General rate increases are authorized in case decisions, which 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 as required by the CPUC so that regulatory lag is avoided.

The purpose of an offset rate increase is to compensate utilities for increases in specific pre-authorized offsettable capital investments or expenses, primarily for purchased water, groundwater extraction charges and 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 such revenue offsets have been authorized. 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.

CLWSC is subject to the regulation of the Texas Commission on Environmental Quality (“TCEQ”). The TCEQ authorizes rate increases after the filing of an Application for a Rate/Tariff Change. Such filings may be filed twelve months following the resolution of the previous filing.

On January 21, 2009, San Jose Water Company filed an application with the CPUC requesting general rate increases of $36,207,000, or 18.44% in 2010, $15,171,000, or 6.52% in 2011, and $19,899,000, or 8.10% in 2012. San Jose Water Company is proposing this rate increase due to escalating operating expenses as well as significant system infrastructure replacement requirements over the next several years. The capital budgets for the years noted above are also increasing due to significantly higher construction costs. The infrastructure improvements such as water main and well replacements, improvements to pumping stations, well fields, water tanks and replacements throughout San Jose Water Company’s 138 square mile service area are necessary in order to maintain safe and reliable water service to customers. The application is currently under review by the CPUC and a decision on the request is expected in late 2009, with new rates becoming effective January 1, 2010.

Please also see Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Financial Information about Industry Segments

See Part II, Item 7 for information regarding SJW Corp.’s business segments.

Description of Business

General

The principal business of the Water Utility Services consists of the production, purchase, storage, purification, distribution, and retail sale of water. San Jose Water Company provides water service to approximately 226,000 connections that serve 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. CLWSC provides water service to approximately 8,700 connections that serve approximately 36,000 residents in a service area comprising more than 153 square miles in the growing region between San Antonio and Austin, Texas.

 

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San Jose Water Company also provides nonregulated water related services under agreements with municipalities. These nonregulated services include full water system operations, cash remittances and maintenance contract services.

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 4,500 service connections. Under the terms of the lease, San Jose Water Company paid an up-front $6.8 million concession fee to the City of Cupertino that is 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 fluctuate 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 the Water Utility Services service areas. 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 satisfies about 6% to 8% of San Jose Water Company’s 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. San Jose Water Company pumps the remaining 40% to 50% of its water supply from the underground basin and pays a groundwater extraction charge to SCVWD.

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. 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.

In 2008, the level of water in the Santa Clara Valley groundwater basin, which is the responsibility of SCVWD, remained comparable to the 30-year average level. On December 29, 2008, SCVWD’s 10 reservoirs were 45.4% full with 76,671 acre-feet of water in storage. The rainfall from July 1, 2008 to December 29, 2008 was about 66% of the 30-year average. In addition, the rainfall at San Jose Water Company’s Lake Elsman was measured at 12.77 inches for the period from July 1, 2008 through January 28, 2009, which is 49% of the five-year average. The delivery of California and federal contract water to SCVWD may be reduced, resulting in target deliveries to retail agencies being rolled back to 90% of contract amounts. SCVWD has also stated that there will not be any physical restriction as it is SCVWD’s expectation that San Jose Water Company will be able to manage its various sources of water supply to stay within the 90% of contract amounts. San Jose Water Company believes that its various sources of water supply, including an increased reliance on groundwater, are sufficient to meet customer demand for the remainder of 2009.

 

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The continuing dry weather in California and concerns about the San Joaquin-Sacramento River Delta prompted Governor Schwarzenegger on June 3, 2008 to issue an Executive Order (S-06-08) declaring a state-wide water emergency. The order directed state agencies to take immediate action to address drought conditions and water delivery reductions that may exist by expediting grant programs, technical assistance, and water conservation outreach. The order did not mandate water use restrictions or reductions.

On December 15, 2008, the U.S. Fish and Wildlife Service issued a new Biological Opinion (BiOp) and Incidental Take Statement for the Central Valley Project (CVP) and the State Water Project (SWP) on the Delta smelt. The operating requirements of BiOp immediately replace the interim remedy ordered by Federal Judge Oliver Wanger in December 2007. The BiOp prescribes a range of operational criteria that are determined based on hydrology, fish distribution, abundance, and other factors. Under a “most likely” scenario, the California Department of Water Resources (DWR) and United States Bureau of Reclamation (USBR) estimate that SWP and CVP supplies to SCVWD could be reduced by approximately 17% to 18% of the supply amount they currently receive. Under a “worst case” BiOp scenario, SWP and CVP supplies to SCVWD could be reduced by approximately 32% to 33% of the current supply amount they receive. While there is some overlap with the California Fish and Game Commission’s restrictions to protect longfin smelt, the longfin pumping restrictions, if triggered, could cause significant supply impacts beyond those estimated to comply with Delta smelt requirements.

The SCVWD announced that at their March 24, 2009 meeting, they will determine whether to recommend mandatory conservation. To effect mandatory water restrictions, SCVWD must work with other political subdivisions that possess the authority to enact and enforce drought ordinances in order to effect such restrictions. Additionally, water systems subject to the jurisdiction of the CPUC must receive approval from the CPUC for changes in tariffs and other matters related to the implementation of water restrictions. During the interim, SCVWD is continuing to ask the public to voluntarily reduce water usage by 10%.

Except for a few isolated cases when service had been interrupted or curtailed because of power or equipment failures, construction shutdowns, or other operating difficulties, San Jose Water Company has not had any interrupted or imposed mandatory curtailment of service to any type or class of customer with the exception of the summer of 1989 through March 1993, when rationing was imposed intermittently on customers at the request of SCVWD.

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.

CLWSC’s water supply consists of groundwater from wells and purchased raw water from the Guadalupe-Blanco River Authority (“GBRA”). CLWSC has long-term agreements with GBRA, which expire in 2044 and 2050. The agreements provide CLWSC with 6,000 acre-feet of water per year from Canyon Lake at prices to be adjusted periodically by GBRA.

Please also see further discussion under Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Franchises

Franchises granted by local jurisdictions permit the Water Utility Services to construct, maintain, and operate a water distribution system within the streets and other public properties of a given jurisdiction. San Jose Water Company holds the necessary franchises to provide water in portions of the cities of San Jose and Cupertino and in the cities of Campbell, Monte Sereno and Saratoga, the town of Los Gatos and the unincorporated areas of Santa Clara County. None of the franchises have a termination date, other than the franchise for the unincorporated areas of Santa Clara County, which terminates in 2020.

 

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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

San Jose Water Company and CLWSC are public utilities regulated by CPUC and TCEQ, respectively, and operate within a service area approved by the regulators. The statutory laws provide that no other investor-owned public utility may operate in the public utilities’ service areas without first obtaining from the regulator a certificate of public convenience and necessity. Past experience shows such a certificate will be issued only after demonstrating that 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 statutory constitution, 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 its water systems.

Environmental Matters

The Water Utility Services’ procedures produce potable water in accordance with all applicable county, state and federal environmental rules and regulations. Additionally, public utilities are subject to environmental regulation by various other state and local governmental authorities.

The Water Utility Services are currently in compliance with all of the United States Environmental Protection Agency’s (the “EPA”) surface water treatment performance standards, drinking water standards for disinfection by-products and primary maximum contaminant levels. These standards have been adopted and are enforced by the California Department of Public Health (“CDPH”) and the TCEQ for San Jose Water Company and CLWSC, respectively.

Other state and local environmental regulations apply to the Water Utility Services operations and facilities. These regulations relate primarily to the handling, storage and disposal of hazardous materials and discharges to waterways. As part of routine replacement of infrastructure, San Jose Water Company identified legacy equipment containing mercury which had leaked into the surrounding soil. San Jose Water Company has determined there is no risk of contamination to the water supply, has notified the appropriate authorities and is also working with an environmental consulting firm to remediate the effected area and assess other potential sites. SJW Corp. believes there will be no material financial impact.

San Jose Water Company is currently in compliance with all 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, 2008, SJW Corp. had 379 employees, of whom 342 were San Jose Water Company employees and 37 were CLWSC employees. At San Jose Water Company, 101 were executive, administrative or supervisory personnel, and 241 were members of unions. On February 7, 2008, San Jose Water Company

 

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reached a two-year collective bargaining agreement with the Utility Workers of America, representing the majority of all employees, and the International Union of Operating Engineers, representing certain employees in the engineering department, covering the period from January 1, 2008 through December 31, 2009. Both groups are affiliated with the AFL-CIO. The agreements include a wage adjustment of approximately 3.3% for union workers for the calendar year 2009 and minor benefit modifications. As of December 31, 2008, CLWSC had 37 employees, of whom 10 were exempt and 27 were non-exempt employees. Non-exempt employees are subject to overtime but are not union represented.

Officers of the Registrant

 

Name

  Age   

Offices and Experience

G.J. Belhumeur

  63    San Jose Water Company—Senior Vice President, Operations. Mr. Belhumeur has served as Senior Vice President of Operations since 2004. From 1996 to 2003, Mr. Belhumeur was Vice President of Operations. Mr. Belhumeur has been with San Jose Water Company since 1970.

D. Drysdale

  53    San Jose Water Company—Vice President, Information Systems. Mr. Drysdale has served as Vice President of Information Systems since 2000. From 1998 to 1999, Mr. Drysdale was Director of Information Systems. From 1994 to 1998, Mr. Drysdale was Data Processing Manager. Mr. Drysdale joined San Jose Water Company in 1992.

D.A. Green

  46    SJW Corp. and San Jose Water Company—Chief Financial Officer and Treasurer. Mr. Green has served as Chief Financial Officer and Treasurer since August 11, 2008. He is also Chief Financial Officer and Treasurer of SJW Land Company and SJWTX, Inc. Prior to his employment with SJW Corp., Mr. Green served as the Chief Financial Officer, Treasurer and Vice President for Specialized Health Products International, Inc. and Managing Director of Investment Banking for Duff & Phelps.

C.S. Giordano

  52    San Jose Water Company—Officer, Chief Engineer. Mr Giordano has served as Chief Engineer since January 2008. From June 2007 to January 2008, Mr. Giordano was Chief Engineer. From August 2000 to June 2007, Mr. Giordano was Director of Engineering and Construction. From January 1994 to August 2000, Mr. Giordano was Assistant Chief Engineer. Mr. Giordano has been with San Jose Water Company since 1994.

P. L. Jensen

  49    San Jose Water Company—Vice President, Regulatory Affairs. Mr. Jensen has served as Vice President of Regulatory Affairs since July 2007. From 1995 to July 2007, Mr. Jensen was Director of Regulatory Affairs. Mr. Jensen has been with San Jose Water Company since 1995.

S. Papazian

  33    SJW Corp. and San Jose Water Company—Corporate Secretary and Attorney. Ms. Papazian has served as Corporate Secretary and Attorney since February 14, 2005. She is also Corporate Secretary of SJW Land Company and SJWTX, Inc. She was admitted to the California State Bar in January 2000 and thereafter was an Associate Attorney at The Corporate Law Group from March 2000 until February 2005.

B. J. Schmidt

  60    San Jose Water Company—Controller. Ms. Schmidt has served as Controller since October 22, 2008. Previously Ms. Schmidt was a financial consultant since 2007. From 2001 to 2006, Ms. Schmidt was Vice President of Finance and Controller for Siemens Medical Solutions USA Inc., Ultrasound Division. Ms. Schmidt is a certified public accountant.

 

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Name

  Age   

Offices and Experience

W.R. Roth

  56    SJW Corp.—President and Chief Executive Officer of SJW Corp., San Jose Water Company, SJW Land Company, and SJWTX, Inc. Mr. Roth was appointed Chief Executive Officer of SJW Corp. in 1999 and President in 1996. Mr. Roth has been with San Jose Water Company since 1990.

A. Yip

  55    SJW Corp. and San Jose Water Company—Executive Vice President of Finance. Ms. Yip has served as Executive Vice President of Finance since August 2008. From October 1996 to August 2008, Ms. Yip served as Chief Financial Officer and Treasurer of SJW Corp., and Senior Vice President of Finance, Chief Financial Officer and Treasurer of San Jose Water Company since April 2004. From January 1999 to April 2004, Ms. Yip served as Vice President of Finance, Chief Financial Officer and Treasurer of San Jose Water Company. She is also Executive Vice President, Finance of SJWTX, Inc. and SJW Land Company. Ms. Yip has been with San Jose Water Company since 1986. Ms. Yip is a certified public accountant.

R.S. Yoo

  58    San Jose Water Company—Chief Operating Officer. Mr. Yoo has served as Chief Operating Officer since July 2005. From April 2003 to July 2005, Mr. Yoo was Senior Vice President of Administration. From April 1996 to April 2003, Mr. Yoo was Vice President of Water Quality. Mr. Yoo has served as President of Crystal Choice Water Service LLC from January 2001 to August 2005 and Manager from January 2001 to January 2007. Mr. Yoo was appointed Vice President of SJWTX, Inc. from September 2005 to April 2008. Mr. Yoo has been with San Jose Water Company since 1985.

Financial Information about Foreign and Domestic Operations and Export Sales

SJW Corp.’s revenue and expense are derived substantially from Water Utility Services’ operations located in the County of Santa Clara in the State of California and Comal County in the State of Texas.

Website Access to Reports

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 SJW Corp. electronically files such material with, or furnish such material to, the SEC. The content of SJW Corp.’s website is not intended to be incorporated by reference or part of this report.

 

Item 1A. Risk Factors

Investors should carefully consider the following risk factors and warnings before making an investment decision. The risks described below are not the only ones facing SJW Corp. Additional risks that SJW Corp. does not yet know of or that it currently thinks are immaterial may also impair its business operations. If any of the following risks actually occur, SJW Corp.’s business, operating results or financial condition could be materially harmed. In such case, the trading price of SJW Corp.’s common stock could decline and you may lose all or part of your investment. Investors should also refer to the other information set forth in this Form 10-K, including the financial statements and the notes thereto.

 

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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. The operating revenue of San Jose Water Company results from the sale of water at rates authorized by CPUC. The operating revenue of CLWSC results from the sale of water at rates authorized by TCEQ. The CPUC and TCEQ set rates that are intended to provide revenues sufficient to recover operating expenses and produce a reasonable return on common equity.

On November 11, 2006, CPUC issued its final decision in San Jose Water Company’s 2006 General Rate Case proceeding. The decision authorized San Jose Water Company rate increases of approximately $3,500,000, or 2.0%, for 2007, $5,400,000, or 3.0%, for 2008, and $4,000,000, or 2.2%, for 2009. The rate increases for 2008 and 2009 are subject to adjustments based upon the inflation escalation factors realized at the time of the increase. The decision also authorizes additional rate recoveries to be phased in as capital projects are completed over the three-year period and the recovery of approximately $450,000 from San Jose Water Company’s balancing and memorandum accounts. These rate increases are designed to produce a return on common equity of 10.13%, which is comparable with recent authorized returns for water utilities in California.

On November 17, 2008, CLWSC filed a request for a general rate increase for Canyon Lake with the TCEQ. The filing contains a request for an increase in revenue of approximately $775,000, or about 14%. The rates became effective subject to refund on January 16, 2009. A final resolution is expected from the TCEQ in the summer of 2009.

On November 19, 2008, San Jose Water Company implemented an increasing block rate structure for residential customers as required by CPUC D.08-08-030. This change is not a revenue increase, but rather it is a change in rate design that is applicable to all residential customers. All other customer classes remain on the original uniform rate structure.

Although the Water Utility Services believe 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 Water Utility Service’s future rate filings will be able to obtain a satisfactory rate of return in a timely manner.

In addition, the Water Utility Services rely on policies and regulations promulgated by the regulators in order to recover capital expenditures, maintain favorable treatment on gains from the sale of real property, offset its production and operating costs, recover the cost of debt, maintain an optimal equity structure without over-leveraging, and have financial and operational flexibility to engage in nonregulated operations. If the regulators implement policies and regulations that will not allow San Jose Water Company and CLWSC to accomplish some or all of the items listed above, the Water Utility Services future operating results may be adversely affected.

Recovery of regulatory assets is subject to adjustment by the regulatory agency and could impact the operating results of the Water Utility Services.

Generally-accepted accounting principles for water utilities include the recognition of regulatory assets and liabilities as permitted by Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation.” In accordance with SFAS No. 71, the Water Utility Services record 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. If the assessment of the probability of recovery in the ratemaking process is incorrect, the regulatory assets or liabilities would need to be adjusted, which could have an adverse effect on our financial results.

 

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Changes in water supply, water supply costs or the mix of water supply could adversely affect the operating results and business of the Water Utility Services.

San Jose Water Company’s supply of water primarily relies upon three main sources: water purchased from SCVWD, surface water from its Santa Cruz Mountains Watershed, and pumped underground water. Changes and variations in quantities from each of these three sources affect the overall mix of the water supply, thereby affecting the cost of the 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 by the CPUC to recover the additional or increased water supply costs, its operating results may be adversely affected.

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 SCVWD due to availability, environmental or legal restrictions (see also Part I, Item 1, “Water Supply”), it may not be able to fully 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% to 8% of the total water supply of the system. In a 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, 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 require a significant amount of energy, increases in energy prices could increase operating expenses of San Jose Water Company. In the aftermath of the attempt to deregulate the California energy market, energy costs still remain in flux, with resulting uncertainty in San Jose Water Company’s ability to contain energy costs into the future.

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 consumed at the lowest rates. Optimization and energy management efficiency is achieved through the implementation of Supervisory Control and Data Acquisition system software applications that control pumps based on demand and cost of energy. An increase in demand or a reduction in the availability of surface water or import water could result in the need to pump more water during peak hours adversely affecting the operating results of San Jose Water Company.

CLWSC’s primary water supply is 6,000 acre-feet of water which is pumped from Canyon Lake at two lake intakes, in accordance with the terms of its contracts with the GBRA, which are long-term take-or-pay contracts. This supply is supplemented by groundwater pumped from wells. Texas, similar to California, faces similar operating challenges as described above and long-term water supply constraints. (See also Part I, Item 1, “Water Supply.”)

Fluctuations in customer demand for water due to seasonality, restrictions of use, weather, and lifestyle can adversely affect operating results.

The Water Utility Services’ operations are seasonal. Thus, results of operations for one quarter do not indicate results to be expected in subsequent quarters. Rainfall and other weather conditions also affect the operations of the Water Utility Services. Most water consumption occurs during the third quarter of each year

 

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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 and construction codes, which require the use of low-flow plumbing fixtures, could diminish water consumption and result in reduced revenue.

A contamination event or other decline in source water quality could affect the water supply of the Water Utility Services and therefore adversely affect the business and operating results.

The Water Utility Services are required under environmental regulations to comply with water quality requirements. Through water quality compliance programs, the Water Utility Services continually monitor for contamination and pollution of its sources of water. In addition, a Watershed Management Program provides a proactive approach to minimize potential contamination activities. There can be no assurance that we will continue to comply with all applicable water quality requirements. In the event a contamination is detected, the Water Utility Services will either have to commence treatment to remove the contaminant or procure water from an alternative source. Either of these results may be costly, may increase future capital expenditures and there can be no assurance that the regulators would approve a rate increase to enable us to recover the costs arising from these remedies.

The Water Utility Services are subject to litigation risks concerning water quality and contamination.

Although the Water Utility Services have not been and are not a party to any environmental and product-related lawsuits, such lawsuits against other water utilities have increased in frequency in recent years. If the Water Utility Services are subject to an environmental or product-related lawsuit, they might incur significant legal costs and it is uncertain whether they would be able to recover the legal costs from ratepayers or other third parties. Although the Water Utility Services have product liability insurance coverage for bodily injury and property damage, pollution is excluded from this coverage. In additions, our pollution liability policy does not extend coverage for product liability.

New or more stringent environmental regulations could increase the Water Utility Services’ operating costs and affect its business.

The Water Utility Services’ operations are subject to water quality and pollution control regulations issued by the EPA and environmental laws and regulations administered by the respective states and local regulatory agencies.

Stringent environmental and water quality regulations could increase the Water Utility Services’ water quality compliance costs, hamper the Water Utility Services’ available water supplies, and increase future capital expenditure.

Under the federal Safe Drinking Water Act, the Water Utility Services are 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 for drinking water. The Water Utility Services are currently in compliance with all of the 87 primary maximum contaminant levels promulgated to date. Additional or more stringent requirements may be adopted by each state. There can be no assurance that the Water Utility Services will be able to continue to comply with all water quality requirements.

The Water Utility Services have implemented monitoring activities and installed specific water treatment improvements enabling it to comply with existing maximum contaminant levels and plan for compliance with future drinking water regulations. However, the EPA and the respective state agencies have continuing authority

 

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to issue additional regulations under the Safe Drinking Water Act. It is possible that new or more stringent environmental standards could be imposed that will raise the Water Utility Services’ 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 by-products. The Water Utility Services continues to seek 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 the Water Utility Services.

Water utility companies have generally been on a heightened state of alert since the threats to the nation’s health and security in September 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. These improvements were incorporated into the capital budgets and were completed as of December 31, 2006. San Jose Water Company has and will continue to bear costs associated with additional security precautions to protect its water utility business and other operations. While some of these costs are likely to be recovered in the form of higher rates, there can be no assurance that CPUC will approve a rate increase to recover all or part of such costs and, as a result, the company’s operating results and business may be adversely affected.

CLWSC evaluated its security measures and has completed and implemented a new risk management plan. As a result, CLWSC replaced all building and chemical vessel locks, installed new fences at the Park Shores Water Treatment Plant and several wells, repaired fences at other well sites, improved exterior lighting at the water treatments plants and installed new network firewalls for its computer systems.

The Water Utility Services rely on information technology and systems that are key to business operations, therefore a disruption in service could adversely effect business operations.

Information technology is key to the operation of the Water Utility Services, including but not limited to bill remittance processing, providing customer service and the use of Supervisory Control and Data Acquisition systems to operate the distribution system. A disruption of a business system that supports any of these functions could significantly impact our ability to provide services to our customers.

SJW Land Company’s significant increase in its real estate portfolio.

SJW Land Company owns a diversified real estate portfolio in multiple states. The risks in investing directly in real estate vary depending on the investment strategy and investment objective.

 

   

Liquidity risk—real estate investment is illiquid. The lag time to build or reduce its portfolio is long.

 

   

Obsolescence risk—real estate property is location specific. Location obsolescence can occur due to a decline of a particular sub-market or neighborhood. Functional obsolescence can also occur from physical depreciation, wear and tear, and other architectural and physical features which could be curable or incurable.

 

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Market and general economic risks—real estate investment is tied to overall domestic economic growth and, therefore, carries market risk which cannot be eliminated by diversification. Generally, all property types benefit from national economic growth, though the benefits range according to local factors, such as local supply and demand and job creation. Because real estate leases are typically staggered and last for multiple years, there is generally a lag effect in the performance of real estate in relation to the overall economy. This lag effect can insulate or deteriorate the financial impact to SJW Land Company in a downturn or an improved economic environment.

Vacancy rates can climb and market rents can be impacted and weakened by general economic forces, therefore affecting income to SJW Land Company.

The value of real estate can drop materially due to a deflationary market, decline in rental income, market cycle of supply and demand, long lag time in real estate development, legislative and governmental actions, environmental concerns, and fluctuation of interest rates, eroding any unrealized capital appreciation and, potentially, invested capital.

 

   

Credit risk—the risk of a tenant declaring bankruptcy and seeking relief from its contractual rental obligation could affect the income and the financial results of SJW Land Company. Diversification of many tenants across many properties may mitigate the risk, but can never eliminate it. This risk is most prevalent in a recessionary environment.

In the first quarter of 2009, SJW Land Company was informed that one of its tenants filed a Chapter 11 bankruptcy and intends to liquidate its operations through the United States Bankruptcy Court in Delaware. Such tenant currently leases a 148,000 square foot office building and a 346,000 square foot distribution building from SJW Land Company in Knoxville, Tennessee under triple net leases which have been paid through February 2009. Pursuant to applicable bankruptcy laws and bankruptcy court rules, the tenant will have a limited period of time to decide whether it will terminate its office and distribution leases or sell its rights under the leases. In the event that the leases are terminated, SJW Land Company will incur all holding costs and will seek to re-lease the premises. However, there will be no assurance that SJW Land Company will be able to secure a new tenant; or if it is able to secure a new tenant, when this will occur or whether the leases will be under similar terms.

The success of SJW Land Company’s real estate investment strategy depends largely on ongoing local, state and federal land use development activities and regulations, future economic conditions, the development and fluctuations in the sale of the undeveloped properties, the ability to identify the developer/potential buyer of the available for-sale real estate, the timing of the transaction, favorable tax law, the ability to identify and acquire high quality, relatively low risk replacement property at reasonable terms and conditions, and the ability to maintain and manage the replacement property.

Potential impact of the economy on operations.

SJW Corp.’s financial performance could be impacted by the recent turmoil in the United States credit markets and recessionary economic environment. The United States credit markets began to tighten significantly in late 2007 and continued that trend through 2008. The tightening of the credit markets eventually led to a complete freeze in lending in 2008. Since SJW Corp. is dependent upon debt financing to supplement its cash flow from operations to fund its capital investment program, a freeze in lending could impair SJW Corp.’s capital spending plans, which could impact our ability to grow our utility asset base and earnings.

In addition to the constraints resulting from a challenging credit market, the United States economy entered a recession in late 2007. The recession can be largely attributable to a steep decline in consumer spending which has been driven largely by declining real estate values together with the general lack of consumer credit availability. The decline in consumer spending has led to substantial lay-offs, with approximately 2 million jobs shed from United States companies. Due to this weak economic scenario and high unemployment rates, SJW Corp. may experience a decline in usage, which could negatively impact our revenue growth expectations. Further, due to the large fixed cost structure of our business, a decline in revenue could negatively impact expected earnings.

 

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Other factors that could affect operating results.

Other factors that could adversely affect the operating results of SJW Corp. and its subsidiaries include the following:

 

   

SJW Corp.’s growth strategy depends on its ability to acquire water systems in order to broaden its service areas, SJW Land Company’s ability to continue to develop and invest in real estate investments at favorable terms, and San Jose Water Company’s ability to continue to broaden and expand its nonregulated contract services in the metropolitan San Jose area. The execution of SJW Corp.’s growth strategy will expose it to different risks than those associated with the current utility operations. Costs are incurred in connection with the execution of the growth strategy and risks are involved in potential integration of acquired businesses/properties which could require significant costs and cause diversion of management’s time and resources. Any future acquisition SJW Corp. decides to undertake may involve risks and have a material adverse effect on SJW Corp.’s core business, impact SJW Corp.’s ability to finance its business and affect its compliance with regulatory requirements. Any businesses SJW Corp. acquires may not achieve sales, customer growth and projected profitability that would justify the investment. Any difficulties SJW Corp. encounters in the integration process, including the integration of controls necessary for internal control and financial reporting, could interfere with its operations, reduce its operating margins and adversely affect its internal controls.

 

   

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 lease operation could be adversely affected by: (1) the level of capital requirements, (2) the ability of San Jose Water Company to raise rates through the Cupertino City Council, and (3) the level of operating and maintenance expenses.

 

Item 1B. Unresolved Staff Comments

None.

 

Item 2. Properties

The properties of San Jose Water Company consist of a unified water production system 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 236 million gallons, and all water facilities, equipment, office buildings 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 groundwater pumping stations have a production capacity of approximately 238 million gallons per day and the present capacity for taking purchased water is approximately 172 million gallons per day. The surface water collection system has a physical delivery capacity of approximately 35 million gallons per day. During 2008, a maximum and average of 191 million gallons and 134 million gallons of water per day, respectively, were delivered to the system.

The Water Utility Services hold 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 92 acres of property in the states of Connecticut, Florida, Texas, Arizona and Tennessee and approximately five undeveloped acres of land and two acres of land with commercial properties primarily in the San Jose metropolitan area. In February 2007, SJW Land Company purchased a warehouse building, commercial building and undeveloped land in the State of Tennessee. SJW Land Company

 

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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. SJW Land Company consolidates its limited partnership interest in 444 West Santa Clara Street, L.P. as a variable interest entity under Financial Accounting Standards Board Interpretation No. 46R (“FIN46R”), “Consolidation of Variable Interest Entities.” The following table is a summary of SJW Land Company properties described above:

 

Description

  

Location

   Acreage    Square Footage    Percentage of SJW Land
Company Revenue
 

2 Commercial buildings

   San Jose, California    2    28,000    13 %

Warehouse building

   Windsor, Connecticut    17    170,000    11 %

Warehouse building

   Orlando, Florida    8    147,000    7 %

Retail building

   El Paso, Texas    2    14,000    5 %

Warehouse building

   Phoenix, Arizona    11    176,000    13 %

Warehouse building

   Knoxville, Tennessee    29    346,000    23 %

Commercial building

   Knoxville, Tennessee    15    148,000    28 %

Undeveloped land

   Knoxville, Tennessee    10    N/A    N/A  

Undeveloped land

   San Jose, California    5    N/A    N/A  

 

Item 3. Legal Proceedings

SJW Corp. is subject to litigation incidental to its business. However, there are no pending legal proceedings to which SJW Corp. 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 SJW Corp.’s financial position, results of operations or cash flows.

 

Item 4. Submission of Matters to a Vote of Security Holders

None.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

SJW Corp.’s common stock is traded on the New York Stock Exchange under the symbol SJW. Information as to the high and low sales prices for SJW Corp.’s common stock for each quarter in the 2008 and 2007 fiscal years is contained in the section captioned “Market price range of stock” in the tables set forth in Note 16 of “Notes to Consolidated Financial Statements” in Part II, Item 8.

As of December 31, 2008, there were 531 record holders of SJW Corp.’s common stock.

Dividends

Dividends have been paid on SJW Corp.’s and its predecessor’s common stock for 261 consecutive quarters and the annual dividend amount has increased in each of the last 41 years. Additional information as to the cash dividends paid on common stock in 2008 and 2007 is contained in the section captioned “Dividend per share” in the tables set forth in Note 16 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.

 

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Five-Year Performance Graph

The following performance graph compares the changes in the cumulative shareholder return on SJW Corp.’s common stock with the cumulative total return on the Water Utility Index and the Standard & Poor’s 500 Index during the last five years ended December 31, 2008. The comparison assumes $100 was invested on December 31, 2003 in SJW Corp.’s common stock and in each of the foregoing indices and assumes reinvestment of dividends.

LOGO

The following descriptive data is supplied in accordance with Rule 304(d) of Regulation S-T:

 

         2003            2004            2005            2006            2007            2008    

SJW Corp.

   100    126    162    282    256    226

Water Utility Index

   100    114    145    144    135    124

S&P 500 Index

   100    111    116    135    142    90

The Water Utility Index is the 11 water company Water Utility Index prepared by Wachovia.

 

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Item 6. Selected Financial Data

FIVE YEAR STATISTICAL REVIEW

SJW Corp. and Subsidiaries

 

     2008     2007     2006    2005     2004  

CONSOLIDATED RESULTS OF OPERATIONS (in thousands)

           

Operating revenue

   $ 220,347     206,601     189,238    180,105     166,911  

Operating expense:

           

Purchased water

     48,291     48,596     44,896    44,953     41,220  

Power

     7,559     7,532     5,170    4,318     5,511  

Groundwater extraction charges

     34,368     30,141     18,737    17,362     21,773  

Administrative and general

     23,688     22,334     21,108    20,697     17,285  

Other

     16,390     14,907     15,095    14,183     12,892  

Maintenance

     13,123     11,628     10,189    9,475     8,674  

Property taxes and other nonincome taxes

     6,793     6,307     5,893    5,673     5,314  

Depreciation and amortization

     24,043     22,854     21,299    19,654     18,481  

Income taxes

     13,198     12,549     15,298    14,773     11,644  
                               

Total operating expense

     187,453     176,848     157,685    151,088     142,794  
                               

Operating income

     32,894     29,753     31,553    29,017     24,117  

Interest expense, other income and deductions

     (11,433 )   (10,430 )   7,028    (7,177 )   (4,331 )
                               

Net income

     21,461     19,323     38,581    21,840     19,786  

Dividends paid

     11,875     11,089     10,549    9,777     9,319  
                               

Invested in the business

   $ 9,586     8,234     28,032    12,063     10,467  
                               

CONSOLIDATED PER SHARE DATA (BASIC)

           

Net income

   $ 1.17     1.05     2.11    1.20     1.08  

Dividends paid

   $ 0.65     0.60     0.57    0.53     0.51  

Shareholders’ equity at year-end

   $ 13.81     12.92     12.48    10.73     10.11  

CONSOLIDATED BALANCE SHEET (in thousands)

           

Utility plant and intangible assets

   $ 878,743     816,310     740,419    664,117     619,590  

Less accumulated depreciation and amortization

     272,562     255,025     234,173    208,909     189,221  
                               

Net utility plant

     606,181     561,285     506,246    455,208     430,369  
                               

Real estate investment

     88,000     84,195     40,565    34,850     31,987  

Total assets

     850,877     767,326     705,864    587,709     552,152  

Capitalization:

           

Shareholders’ equity

     254,326     236,934     228,182    195,908     184,691  

Long-term debt

     216,613     216,312     163,648    145,279     143,604  
                               

Total capitalization

   $ 470,939     453,246     391,830    341,187     328,295  
                               

OTHER STATISTICS—WATER UTILITY SERVICES

           

Customers at year-end

     234,300     233,300     231,700    222,400     220,800  

Average revenue per customer

   $ 914.46     860.23     809.56    792.08     733.76  

Investment in utility plant per customer

   $ 3,751     3,499     3,196    2,986     2,806  

Miles of main at year-end

     2,814     2,743     2,739    2,447     2,434  

Water production (million gallons)

     51,961     51,922     49,302    48,198     51,082  

Maximum daily production (million gallons)

     204     205     229    201     192  

Population served (estimate)

     1,056,100     1,051,600     1,044,400    1,002,400     995,000  

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Description of Business

SJW Corp. is a publicly traded company and 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 approximately 226,000 connections that serve a population of approximately one million people in an area comprising approximately 138 square miles in the metropolitan San Jose, California area. The United States water utility industry is largely fragmented and is dominated by municipal-owned water systems. The water industry is regulated, and provides a life-sustaining product. This makes water utilities subject to lower business cycle risks than nonregulated industries.

SJW Land Company, a wholly owned subsidiary, owns undeveloped land in the states of California and Tennessee, owns and operates commercial buildings in the states of California, Florida, Connecticut, Texas, Arizona and Tennessee and has a 70% limited partnership interest in 444 West Santa Clara Street, L.P.

SJWTX, Inc., doing business as Canyon Lake Water Service Company, a wholly owned subsidiary, was incorporated in September 2005. CLWSC provides service to approximately 8,700 connections that serve approximately 36,000 residents in a service area comprising more than 153 square miles in the growing region between San Antonio and Austin, Texas, as of December 31, 2008.

SJW Corp. also owns 1,099,952 shares or approximately 5% of California Water Service Group as of December 31, 2008.

On January 31, 2007, the rental equipment and existing inventory of Crystal Choice Water Service LLC, a 75% owned subsidiary engaged in the sale and rental of water conditioning and purification equipment, was sold for $635,000. Crystal Choice Water Service LLC was liquidated in August 2007.

Business Strategy

SJW Corp. focuses its business initiatives in four strategic areas:

 

  (1) Regional regulated water utility operations.

 

  (2) Regional nonregulated water utility related services provided in accordance with the guidelines established by the CPUC.

 

  (3) Real estate investment activities in SJW Land Company.

 

  (4) Out-of-region water and utility related services, primarily in the Western United States.

Regional Regulated Activities

SJW Corp.’s regulated utility operation is conducted through San Jose Water Company, a wholly owned water utility subsidiary that provides water service to the greater metropolitan San Jose area, and CLWSC, a wholly owned regulated utility subsidiary in the State of Texas. SJW Corp. plans and applies a diligent and disciplined approach to maintaining and improving its water system infrastructure. It also seeks to acquire regulated water systems adjacent to or near its existing service territory.

Regional Nonregulated Activities

Operating in accordance with guidelines established by the CPUC, San Jose Water Company provides nonregulated water services under agreements with municipalities and other utilities. Nonregulated services include water system operations, billings and cash remittance processing, maintenance services, and telecommunication antenna leasing.

 

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San Jose Water Company also seeks appropriate nonregulated business opportunities that complement its existing operations or that allow it to extend its core competencies beyond existing operations. San Jose Water Company seeks opportunities to fully utilize its capabilities and existing capacity by providing services to other regional water systems, benefiting its existing regional customers through increased efficiencies.

Real Estate Investment

SJW Land Company’s real estate investments diversify SJW Corp.’s asset base and balances SJW Corp.’s concentration in regulated assets. SJW Land Company implements its real estate investment strategy by exchanging selected real estate assets for investments with a capital structure and risk and return profile that is consistent with SJW Corp.’s consolidated capital structure and risk and return profile.

Out-of-Region Opportunities

SJW Corp. also from time to time pursues opportunities to participate in out-of-region water and utility related services, particularly regulated water businesses, in the Western United States. SJW Corp. evaluates out-of-region and out-of-state opportunities that meet SJW Corp.’s risk and return profile.

The factors SJW Corp. considers in evaluating such opportunities include:

 

   

regulatory environment;

 

   

synergy potential;

 

   

general economic conditions;

 

   

potential profitability;

 

   

additional growth opportunities within the region;

 

   

water supply, water quality and environmental issues; and

 

   

capital requirements.

SJW Corp. cannot be certain it will be successful in consummating any transactions relating to such opportunities. In addition, any transaction will involve numerous risks. Some of the risks include the possibility of paying more than the value derived from the acquisition, the assumption of certain known and unknown liabilities related to the acquired assets, the risk of diverting management’s attention from normal daily operations of the business, the potential for a negative impact to SJW Corp.’s financial condition and operating results, the risks of entering markets in which SJW Corp. has no or limited direct prior experience and the potential loss of key employees of any acquired company. SJW Corp. cannot be certain that any transaction will be successful and will not materially harm its operating results or financial condition.

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 other assumptions that are believed to be reasonable under the circumstances. The impact and any associated risks related to these policies on SJW Corp.’s business operations are discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect SJW Corp.’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.” SJW Corp.’s critical accounting policies are as follows:

 

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Revenue Recognition

SJW Corp. recognizes its regulated and nonregulated revenue when services have been rendered, in accordance with SEC Staff Accounting Bulletin 104, “Revenue Recognition.”

Metered revenue of the Water Utility Services includes billing to customers based on meter readings plus an estimate of water used between the customers’ last meter reading and the end of the accounting period. The Water Utility Services read the majority of its customers’ meters on a bi-monthly basis and records its revenue based on its meter reading results. Unbilled revenue from the last meter reading date to the end of the accounting period is estimated based on the most recent usage patterns, production records and the effective tariff rates. Actual results could differ from those estimates, which would result in adjusting the operating revenue in the period which the revision to the Water Utility Services’ estimates are determined. As of December 31, 2008 and 2007, accrued unbilled revenue was $12,896,000 and $12,654,000, respectively. Unaccounted for water for 2008 and 2007 approximated 7.4% and 7.2%, respectively, as a percentage of production. The estimate is based on the results of past experience, the trend and efforts in reducing the Water Utility Services’ unaccounted-for water through customer conservation, main replacements and lost water reduction programs.

Revenues also include a surcharge collected from regulated customers that are paid to the CPUC. This surcharge is recorded in operating revenues and administrative and general expenses. For the years ended December 31, 2008, 2007 and 2006, the surcharge was $2,999,000, $2,708,000 and $2,505,000, respectively.

SJW Corp. recognizes its nonregulated revenue based on the nature of the nonregulated business activities. Revenue from San Jose Water Company’s nonregulated utility operations and billing or maintenance agreements are recognized when services have been rendered. Revenue from SJW Land Company properties is generally recognized ratably over the term of the leases.

Recognition of Regulatory Assets and Liabilities

Generally-accepted accounting principles for water utilities include the recognition of regulatory assets and liabilities as permitted by Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation.” In accordance with SFAS No. 71, the Water Utility Services, to the extent applicable, record deferred costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that these costs and credits will be recognized in the ratemaking process in a period different from when the costs and credits are incurred. Accounting for such costs and credits is based on management’s judgment and prior historical ratemaking practices, and it occurs when management determines that it is probable that these costs and credits will be recognized in the future revenue of the Water Utility Services through the ratemaking process. The regulatory assets and liabilities recorded by the Water Utility Services, in particular, San Jose Water Company, primarily relate to the recognition of deferred income taxes for ratemaking versus tax accounting purposes and the postretirement pension benefits, medical costs, accrued benefits for vacation and asset retirement obligation that have not been passed through rates. The disallowance of any asset in future ratemaking, including deferred regulatory assets, would require San Jose Water Company to immediately recognize the impact of the costs for financial reporting purposes. No disallowance was recognized at December 31, 2008 and December 31, 2007. The net regulatory assets recorded by San Jose Water Company were $73,778,000 and $44,712,000 as of December 31, 2008 and 2007, respectively. As of December 31, 2006, San Jose Water Company has recorded its expected postretirement benefit plan liabilities and a corresponding regulatory asset relating to the implementation of the SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans,” including a reclassification of benefit obligations previously recorded to comprehensive income, in the amount of $3,666,000, resulting in an increase to regulatory assets of $38,410,000. The change in regulatory assets from 2006 to 2007 and 2007 to 2008 was primarily attributable to the funded status of pensions and other postretirement benefit plans based on the projected benefit obligations and the gross-up for taxes.

 

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Pension Accounting

San Jose Water Company offers a defined benefit plan, an Executive Supplemental Retirement Plan and certain postretirement benefits other than pensions to employees retiring with a minimum level of service. Accounting for pensions and other postretirement benefits requires an extensive use of assumptions about the discount rate applied to expected benefit obligations, expected return on plan assets, the rate of future compensation increases received by the employees, mortality, turnover and medical costs. See assumptions and disclosures detailed in Note 10 of “Notes to Consolidated Financial Statements.”

The Pension Plan is administered by a committee that is composed of an equal number of Company and Union representatives (the “Committee”). Investment decisions have been delegated by the Committee to an Investment Manager, presently Wachovia Securities, LLC. Investment guidelines provided to the Investment Manager require that at least 25% of plan assets be invested in bonds or cash. As of December 31, 2008, the plan assets consist of approximately 45% bonds, 3% cash and 52% equities. 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. They may not invest in commodities and futures contracts, private placements, options, letter stock, speculative securities, or hold more than 5% of assets of any one private corporation. They may only invest in bonds, commercial paper, and money market funds with acceptable ratings by Moody’s or Standard & Poor’s. The Investment Manager is reviewed regularly regarding performance by the Investment Consultant who provides quarterly reports to the Committee for review.

The market values of the plan assets are marked to market at the measurement date. The investment trust assets incur unrealized market gains or losses from time to time. As a result the pension expense in 2008 included the amortization of unrealized market losses on pension assets. Both unrealized market gains and losses on pension assets are amortized over 13.25 years for actuarial expense calculation purposes. Market losses in 2007 increased pension expense by approximately $142,000 in 2008 and market gains in 2006 decreased pension expense by approximately $223,000 in 2007.

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 regulatory environment. These differences result in deferred tax assets and liabilities, which are included on 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.

Balancing Account

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. The purpose of a balancing account is to track the under-collection or over-collection associated with expense changes and the revenue authorized by CPUC to offset those expense changes.

A separate balancing account must be maintained for each offset expense item (e.g., purchased water, purchased power and groundwater extraction charges). 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 account tends to reflect an under-collection while, during the winter months when demand for water is relatively lower, the account tends to reflect an over-collection. 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. However, had the balancing account been recognized in San Jose Water Company’s financial statements, San Jose Water Company’s retained earnings would be decreased by the amount of the account over-collection or increased by the amount of the account under-collection, less applicable taxes. Please also see Item 1A, “Risk Factors.”

 

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As of December 31, 2008 and 2007, the total accrued balance in San Jose Water Company’s balancing account was an over-collection of $1,977,000 and $1,656,000, respectively, including interest. All balancing accounts will be reviewed by the CPUC in San Jose Water Company’s next general rate case.

Recognition of Gain/Loss on Utility, Nonutility Property and Real Estate Investments

In conformance with generally-accepted accounting principles for rate-regulated public utilities, the cost of retired utility plant, including retirement costs (less salvage), is charged to accumulated depreciation and no gain or loss is recognized for utility plant used and useful in providing water utility services to customers.

Utility property in the Water Utility Services is property that is used and useful in providing water utility services to customers and is included in rate base for rate-setting purposes. In California, real estate type utility property is subject to CPUC Code Section 851, which states any gain recognized will be divided with two-thirds going to the customers and one-third to the shareholders. Net gains or losses from the sale of utility property are recorded as a component of other (expense) income in the consolidated statement of income and comprehensive income.

Nonutility property in the Water Utility Services is property that is neither used nor useful in providing water utility services to customers and is excluded from the rate base for rate-setting purposes. San Jose Water Company recognizes gain/loss on disposition of nonutility property in accordance with CPUC Code Section 790.

SJW Land Company owns real estate investment property, which consists primarily of land and buildings. Net gains and losses from the sale of real estate investments are recorded as a component of other (expense) income in the consolidated statement of income and comprehensive income.

Results of Operations

SJW Corp.’s consolidated net income for the 12 months ending December 31, 2008 was $21,461,000, compared to $19,323,000 for the same period in 2007. The increase of $2,138,000 or 11% includes an after tax gain of $1,224,000 from the sale of Water Utility Services properties in 2008. Please refer to Note 12, “Sale of Real Estate Investments” under Notes to Consolidated Financial Statements.

SJW Land Company and its consolidated variable interest entity, 444 West Santa Clara Street, L.P., which operates commercial building rentals, are collectively referred to as “Real Estate Services.”

Operating Revenue

Operating revenue by segment was as follows:

Operating Revenue

 

     2008    2007    2006
     (in thousands)

Water Utility Services

   $ 213,801    200,004    183,809

Real Estate Services

     6,546    6,486    4,317

All Other

        111    1,112
                
   $ 220,347    206,601    189,238
                

Operating revenue increased $13,746,000 or 7% in 2008 compared to 2007, and $17,363,000 or 9% in 2007 compared to 2006.

 

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The change in consolidated operating revenue was due to the following factors:

 

     2008 vs. 2007
Increase/(decrease)
    2007 vs. 2006
Increase/(decrease)
 
     (in thousands)  

Water Utility Services:

          

Consumption changes

   $ (735 )        $ 2,784      1 %

New customers increase

     574            3,002      2 %

Rate increases

     13,958      7 %     10,409      5 %

Real Estate Services

     60            2,169      1 %

All Other

     (111 )          (1,001 )     
                              
   $ 13,746      7 %   $ 17,363      9 %
                              

2008 vs. 2007

Consolidated operating revenue increased by $13,746,000 in 2008 or 7% in comparison to 2007. The revenue increase consists of $13,797,000 from Water Utility Services and $60,000 from Real Estate Services. The revenue increases were offset by an $111,000 decrease in other revenues primarily due to the sale of the assets of Crystal Choice Water Service LLC on January 31, 2007.

The revenue increase for the Water Utility Services was primarily the result of increases in rates of $13,958,000 and new customers of $574,000 which was offset by a decrease in consumption of $735,000.

As noted in Item 1A, “Risk Factors”, the tenant of the buildings in Tennessee filed Chapter 11 bankruptcy. The tenant will have a limited period of time to decide whether it will terminate its leases or sell its rights under the leases. In the event the leases are terminated and a new tenant is not identified, Real Estate Services revenue for 2009 would be approximately $3,300,000 less than what was recognized in 2008. Further, if the buildings are vacant, Real Estate Services expects to incur holding costs for taxes, insurance, utilities and other miscellaneous expenses.

2007 vs. 2006

Consolidated operating revenue increased by $17,363,000 in 2007 or 9% in comparison to 2006. The revenue increase consists of $16,195,000 from Water Utility Services and $2,169,000 from Real Estate Services. The revenue increases were offset by a $1,001,000 decrease in other revenues primarily due to the sale of the assets of Crystal Choice Water Service LLC on January 31, 2007.

The revenue increase for the Water Utility Services was primarily the result of increases in rates, consumption, customers and a full year of operation at CLWSC. The increase in SJW Land Company was primarily due to a $3,122,000 increase in rental income from the Tennessee warehouse and commercial property acquired in February 2007 and $404,000 is attributable to a full year of rental income from the Arizona warehouse property acquired in June 2006. The SJW Land Company revenue increases were offset by a $1,357,000 decrease in parking and rental revenue as a result of the sale of parking facilities in December 2006.

Water Utility Services Operating Revenue and Customer Counts

The following tables present operating revenues and number of customers by customer group of the Water Utility Services:

Operating Revenue by Customer Group

 

     2008    2007    2006
     (in thousands)

Residential and business

   $ 195,901    182,917    169,251

Industrial

     1,067    1,287    1,115

Public authorities

     11,227    10,469    8,903

Others

     5,606    5,331    4,540
                
   $ 213,801    200,004    183,809
                

 

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Number of Customers

 

     2008    2007    2006

Residential and business

   228,794    227,789    226,332

Industrial

   77    79    83

Public authorities

   1,591    1,715    1,725

Others

   3,838    3,717    3,560
              
   234,300    233,300    231,700
              

Operating Expense

Operating expense by segment was as follows:

Operating Expense

 

     2008    2007    2006
     (in thousands)

Water Utility Services

   $ 183,774    172,698    153,199

Real Estate Services

     2,995    2,994    2,403

All Other

     684    1,156    2,083
                
   $ 187,453    176,848    157,685
                

Operating expense increased $10,605,000 or 6% in 2008 compared to 2007, and $19,163,000 or 12% in 2007 compared to 2006.

The change in operating expense was due to the following:

 

     2008 vs. 2007
Increase/(decrease)
    2007 vs. 2006
Increase/(decrease)
 
     (in thousands)  

Water Production Costs:

        

Change in surface water supply

   $ (2,090 )   (1 )%   $ 8,685     6 %

Change in usage and new customers

     (8 )         3,967     2 %

Purchased water and groundwater extraction charge and energy price increase

     6,047     3 %     4,814     3 %
                            

Total water production costs

     3,949     2 %     17,466     11 %

Administrative and general

     1,354     1 %     1,226     1 %

Other operating expense

     1,483     1 %     (188 )    

Maintenance

     1,495     1 %     1,439     1 %

Property taxes and other non-income taxes

     486         —       414      

Depreciation and amortization

     1,189     1 %     1,555     1 %

Income taxes

     649           (2,749 )   (2 )%
                            
   $ 10,605     6 %   $ 19,163     12 %
                            

The various components of operating expenses are discussed below.

Water production costs

2008 vs. 2007

Water production costs increased $3,949,000 primarily due to $6,047,000 in purchased water and groundwater extraction charge price increases, offset by $2,090,000 in decreased surface water supply costs due to increased availability of surface water supply in 2008 compared to 2007.

 

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2007 vs. 2006

The lack of precipitation in 2007 adversely impacted the Water Utility Services’ operating results. Water production costs increased $17,466,000 primarily due to a decreased surface water supply necessitating $8,685,000 in additional purchased water, $4,393,000 in purchased water unit price increases and additional groundwater extraction charges and $3,967,000 due to increased usage by customers and new customers.

Sources of Water Supply

The Water Utility Services water supply consists of groundwater from wells, surface water from watershed run-off and diversion, reclaimed water and water purchased from regional wholesalers. Surface water is the least expensive source of water. The following table presents the sources of water supply for the Water Utility Services:

 

     Source of Water Supply
     2008    2007    2006
     (million gallons) (MG)

Purchased water

     26,436    28,688    27,722

Groundwater

     22,839    21,766    14,488

Surface water

     2,283    1,051    6,684

Reclaimed water

     404    417    408
                
     51,962    51,922    49,302
                

Average water production cost per MG

   $ 1,736    1,661    1,396
                

Water production in 2008 for the Water Utility Services increased 40 million gallons from 2007. Water production in 2007 increased 2,620 million gallons from 2006. The increases are primarily attributable to an increase in consumption by customers. The changes in operating expenses are consistent with the related water production changes.

The following table represents the cost of purchased water and the groundwater extraction charge for water pumped from the ground basin, per million gallons, as of December 31:

 

     2008    2007    2006

Purchased water

   $ 1,903    1,765    1,642

Groundwater extraction charge

   $ 1,596    1,458    1,335

Other Operating Expense

The following table represents components of other operating expense:

 

     2008    2007    2006
     (in thousands)

Water supply

   $ 1,139    1,137    1,197

Water treatment and quality

     2,924    2,512    2,131

Pumping

     2,257    2,066    1,913

Transmission and distribution

     3,551    3,541    3,430

Customer accounts

     6,273    5,416    4,820

Other

     246    235    1,604
                

Total other operating expenses

   $ 16,390    14,907    15,095
                

 

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2008 vs. 2007

Other operating expense increased $1,483,000 in 2008 or 10% in comparison to 2007. The increase consisted primarily of: (1) $556,000 due to salary increases and new hires, (2) $315,000 in contracted work due to increased repair activity, (3) $235,000 increase in materials, supplies and postage, (4) $191,000 due to an increase in uncollectible accounts, and (5) $186,000 in miscellaneous expenses.

2007 vs. 2006

Other operating expense decreased $188,000 in 2007 or 1% in comparison to 2006. The decrease consisted primarily of: (1) $745,000 due to the sale of Crystal Choice Water Service in January 2007, (2) $252,000 due to the sale of SJW Land Company parking lots in 2006 and (3) $64,000 in miscellaneous expenses. These decreases were offset by: (1) $436,000 increase in CLWSC due to an additional five months of activity and (2) $437,000 in San Jose Water Company due to salary increases and new hires.

Administrative and General Expense

2008 vs. 2007

Administrative and general expense increased $1,354,000 in 2008 or 6% in comparison to 2007. The increase consisted primarily of: (1) $833,000 due to salary increases and new hires, (2) $348,000 due to legal fees and uninsured losses, (3) $325,000 due to the increased cost of health insurance, (4) $126,000 in increased workman’s compensation insurance, and (5) $340,000 in miscellaneous expenses. These increases were offset by a $618,000 decrease in pension and retirement expenses. While SJW Corp. experienced a decrease in the expense for its pension plans in 2008, it anticipates this expense to increase in 2009 due primarily to a decline in the value of the assets held by the pension plan. The decrease in the value of the assets held by the pension plan reflects the 41% decline in the S&P 500 Index for 2008.

2007 vs. 2006

Administrative and general expense increased $1,226,000 in 2007 or 6% in comparison to 2006. The increase consisted primarily of: (1) $558,000 in group insurance costs due to a greater number of employees and higher premiums, (2) $387,000 in salaries and wages due to a greater number of employees and the wage increases for the year, (3) $212,000 in property and liability insurance, (4) $204,000 in regulatory commission expense as a result of increased sales and (5) $116,000 in miscellaneous expenses. These increases were offset by a $251,000 decrease in legal and accounting fees.

Maintenance Expense

2008 vs. 2007

Maintenance expense increased $1,495,000 in 2008 or 13% in comparison to 2007, and $1,439,000 in 2007 or 14% in comparison to 2006. The increase in 2008 consisted primarily of: (1) $696,000 due to salary increases and new employees, (2) $582,000 in contracted work, paving, and materials and supplies due to increased maintenance and repairs, (3) $183,000 in transportation expenses due to the increased cost of fuel, and (4) $34,000 in miscellaneous expenses. In addition, the level of maintenance expense varies with the level of public work projects instituted by the government, weather conditions and the timing and nature of general maintenance as needed for SJW Corp.’s facilities.

2007 vs. 2006

Maintenance expense increased $1,439,000 in 2007 or 14% in comparison to 2006. The increase in 2007 was primarily due to increased labor costs and an increase in water main and service leaks of approximately 41%.

Property Taxes and Other Non-income Taxes

Property taxes and other non-income taxes for 2008 and 2007 increased $486,000 and $414,000, respectively, primarily due to increased utility property placed in service.

 

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Depreciation

Depreciation expense increased $1,189,000 in 2008 or 5% in comparison to 2007 due to an increase in depreciable assets consisting primarily of the purchase of an office building, main additions and pumping equipment. Depreciation expense increased $1,555,000 in 2007 or 7% in comparison to 2006 due to an increase in depreciable assets, of which $769,000 is applicable to the purchase by SJW Land Company, of an office and distribution facility in Knoxville, Tennessee.

Income Tax Expense

Income tax expense for 2008 was $13,198,000, compared to $12,549,000 in 2007, excluding taxes on the gain on sale of real estate investments and utility plant of $836,000 for 2008.

The effective consolidated income tax rates for 2008, 2007 and 2006 were 40%, 40% and 41%, respectively. Please refer to Note 5, “Income Taxes,” of Notes to Consolidated Financial Statements for the reconciliation of actual income tax expense to expected income taxes.

Other Income and Expense

Interest expense, including interest on long-term debt and mortgages, increased $1,718,000 or 13% in 2008 compared to 2007. In December 2007, San Jose Water Company issued a senior note in the amount of $20,000,000. In addition, SJW Corp. experienced a higher level of borrowing on the line of credit for which the cost of borrowing averaged 3.68% for 2008. SJW Corp.’s consolidated weighted-average cost of long-term debt, including the mortgages and the amortization of debt issuance costs was 6.9%, 6.9% and 7.3% for the years ended December 31, 2008, 2007 and 2006, respectively.

Other income for the year ended December 31, 2008 included an after-tax gain of $1,224,000 related to the sale of properties. In January 2006, SJW Land Company and San Jose Water Company sold approximately one acre of nonutility property, resulting in an after-tax gain of $1,535,000. In December 2006, SJW Land Company sold two real estate investment properties totaling approximately 6.7 acres resulting in an after-tax gain of $14,820,000. Please refer to Note 12, “Sale of Real Estate Investments,” under Notes to Consolidated Financial Statements.

Other comprehensive income in 2008 was $6,107,000, net of tax, which was primarily due to an increase in the market value of the investment in California Water Service Group. Other comprehensive loss in 2007 was $2,201,000, net of tax, which was primarily due to a decrease in the market value of the investment in California Water Service Group.

Liquidity and Capital Resources

The Water Utility Services business derives the majority of its revenue directly from residential and business customers. The Water Utility Services bills the majority of its customers’ on a bi-monthly basis. Payments from customers are impacted by the general economic conditions in the areas where SJW Corp. operates. The current United States recession and related high unemployment rate may have the effect of increasing payment delinquencies. However, such delinquencies are mitigated by service interruptions due to non-payment and the related customer policies. Because California is a high cost of living state, it is possible that Californian’s may migrate to other states with a lower cost of living during this recessionary environment. As of December 31, 2008, the decline in the number of customers is minimal and write-offs for uncollectible accounts have been less than 1% of total revenue.

Funds collected from the Water Utility Service’s customers are used to pay for water production costs, in addition to all costs associated with general operations. Funds are also generated by the issuance of new debt. From these amounts, SJW Corp. paid cash dividends of approximately $11,875,000 and funded its working capital. The remaining amount is available to fund SJW Corp.’s capital expenditure program. In addition to using such internally generated funds, we also fund our capital program with the issuance of new debt.

 

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In 2008, the common dividends declared and paid on SJW Corp.’s common stock represented 55% of net income for 2008. Dividends have been paid on SJW Corp.’s and its predecessor’s common stock for 261 consecutive quarters and the annual dividend amount has increased in each of the last 41 years. While historically SJW Corp. has paid dividends equal to approximately 50% to 60% of its earnings, we cannot guarantee that trend will continue in the future.

Cash Flow from Operations

In 2008, SJW Corp. generated cash flow from operations of approximately $51,800,000, compared to $42,000,000 in 2007 and $44,300,000 in 2006. Cash flow from operations is primarily generated by net income adjusted for non-cash expenses such as depreciation and amortization, deferred income taxes and gains on the sale of assets, offset by working capital changes. The increase in 2008 of cash flow from operations of approximately $9,800,000 was affected by an increase of approximately $9,900,000 in net income adjusted for non-cash items and approximately a $200,000 decrease in working capital. The increase in net income adjusted for non-cash items is primarily related to a decrease in taxes paid of $8,700,000 in 2008 due to bonus depreciation allowed in 2008 but not in 2007 and working capital uses were due to changes in various accruals and a decrease in pension expense from 2007 to 2008. Cash flow from operations in 2007 decreased approximately $2,300,000, which was largely attributable to the decline in operating income in that period.

Cash Flow from Investing Activities

In 2008, SJW Corp. used approximately $68,900,000 of cash for company funded capital expenditures and received approximately $3,300,000 from the sale of real estate investments. In 2007, SJW Corp. used approximately $73,200,000 of cash for company funded capital expenditures and $48,200,000 for the purchase of real estate investments, of which approximately $31,200,000 was due to the sale proceeds held in a trust account from the sale of real estate investments in 2006.

The Water Utility Services’ budgeted capital expenditures for 2009, exclusive of capital expenditures financed by customer contributions and advances is as follows:

 

       Budgeted Capital
Expenditures

2009
 
       (in thousands)  

Water treatment

     $ 1,839      2 %

Source of supply

       3,661      5 %

Reservoirs and tanks

       4,431      6 %

Pump stations and equipment

       6,606      9 %

Equipment and other

       7,529      11 %

Green and alternative energy

       8,974      13 %

Distribution system

       38,374      54 %
                 
     $ 71,414      100 %
                 

The 2009 capital expenditures budget is concentrated in main replacements. Included in the distribution system budgeted capital expenditures of $38,374,000 is approximately $28,000,000 that is planned to be spent to replace the Water Utility Services’ pipes and mains.

The Water Utility Services’ capital expenditures are incurred in connection with normal upgrading and expansion of existing facilities and to comply with environmental regulations. Over the next five years, the Water Utility Services expects to incur approximately $386,885,000 in capital expenditures, which includes replacement of pipes and mains, and maintaining water systems. The Water Utility Services actual capital expenditures may vary from their 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 as a result of new facilities construction funded with advances from developers and contributions in aid of construction.

 

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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.

Cash Flow from Financing Activities

In 2008, borrowings on the line of credit were slightly lower than 2007 and 2006. Repayments on the line of credit were also lower in 2008 compared to 2007 and 2006. In 2007, San Jose Water Company issued two senior notes each in the amount of $20,000,000. In 2006, SJW Land Company obtained a mortgage loan of approximately $3,825,000 and SJWTX, Inc. issued a senior note in the amount of $15,000,000.

The availability on SJW Corp.’s line of credit is $13,600,000 as of December 31, 2008. SJW Corp. expects to draw down on this line of credit and continue its practice of issuing long-term debt to fund its capital expenditure program. See also “Sources of Capital—Water Utility Services” below.

Sources of Capital

Water Utility Services

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. The average borrowing rate of San Jose Water Company’s long-term debt is 7.05%.

Company internally-generated funds, which include allowances for depreciation and deferred income taxes, have provided approximately 50% of the future cash requirements for San Jose Water Company’s capital expenditure. Funding for its future capital expenditure program will be provided primarily through internally-generated funds and long-term debt and will be consistent with the regulator’s guidelines.

San Jose Water Company has outstanding $170,000,000 of unsecured senior notes as of December 31, 2008. 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 12-calendar month period would be less than 175% of interest charges. As of December 31, 2008, San Jose Water Company’s funded debt was 48% of total capitalization and the net income available for interest charges was 384% of interest charges.

On February 2, 2009, San Jose Water Company issued $10,000,000 of Senior Notes Series J, with an interest rate of 6.54%. Proceeds from the sales of Senior Notes Series J will be used to repay short-term borrowings.

San Jose Water Company has received two loans in the aggregate principal amount of $3,076,000 from the California Department of Water Resources’ Safe Drinking Water State Revolving Fund (“SDWSRF”) for the retrofit of San Jose Water Company’s water treatment plants. Terms of these loans require semi-annual payments over 20 years of principal and interest at an annual rate of 2.39% and 2.60%. The outstanding balance as of December 31, 2008 is $2,812,000.

SJWTX, Inc., doing business as Canyon Lake Water Service Company, has outstanding $15,000,000 of senior notes as of December 31, 2008. The senior note agreement has terms and conditions that restrict the

 

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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 12-calendar month period would be less than 175% of interest charges. In addition, SJW Corp. is a guarantor of SJWTX, Inc.’s senior note which has terms and conditions that restrict SJW Corp. from issuing additional funded debt if (1) the funded debt would exceed 66-2/3% of total capitalization, and, (2) the minimum net worth of SJW Corp. becomes less than $125,000,000 plus 30% of the Water Utility Services cumulative net income, since December 31, 2005.

Real Estate Services

As of December 31, 2008, SJW Land Company’s outstanding balance of mortgages related to acquiring properties in various states totaled $25,601,000. The mortgages have various payments, interest and amortization terms and all are secured by the respective properties. The average borrowing rate of SJW Land Company mortgages is 6.07%.

As of December 31, 2008, SJW Land Company also had an outstanding mortgage loan in the amount of $3,905,000 borrowed by its subsidiary, 444 West Santa Clara Street, L.P. The mortgage loan is due April 2011 and is amortized over 25 years with an interest rate of 7.8%. The mortgage loan is secured by the partnership’s real property and is non-recourse to SJW Land Company.

SJW Corp. and its Subsidiaries

SJW Corp. and its subsidiaries consolidated long-term debt was 46% of total capitalization as of December 31, 2008. Management believes that SJW Corp. is capable of obtaining future long-term capital to fund regulated and nonregulated growth opportunities and capital expenditure requirements.

SJW Corp. and its subsidiaries have an unsecured line of credit available that allows aggregate short-term borrowings of up to $35,000,000 at rates that approximate the bank’s prime or reference rate. At December 31, 2008, SJW Corp. and its subsidiaries had available unused short-term bank line of credit of $13,600,000. The cost of borrowing averaged 3.68% for 2008. The line of credit expires on June 1, 2010.

Off-Balance Sheet Arrangement/Contractual Obligations

SJW Corp. has no significant contractual obligations not fully recorded on its Consolidated Balance Sheet or not fully disclosed in the Notes to Consolidated Financial Statements.

SJW Corp.’s contractual obligation and commitments as of December 31, 2008 are as follows:

 

     Contractual Obligations Due in
     Total    Less than
1 Year
   1-5
Years
   After
5 Years
     (in thousands)

Senior notes, Water Utility Services

   $ 185,000          185,000

SJW Land Company mortgages

     25,601    511    9,733    15,357

Advances for construction, San Jose Water Company

     74,787    2,256    8,828    63,703

SDWSRF loan, San Jose Water Company

     2,812    127    539    2,146

444 West Santa Clara Street, L.P. long-term debt (non-recourse to SJW Land Company)

     3,905    109    3,796   
                     

Total contractual cash obligation

   $ 292,105    3,003    22,896    266,206
                     

Total interest on contractual obligations

   $ 271,975    14,711    57,459    199,805
                     

In addition to the obligations listed above, San Jose Water Company issued a standby letter of credit with a commercial bank in the amount of $2,000,000 and $1,000,000 in support of its $1,763,000 and $1,049,000 SDWSRF loans which were funded in 2005 and 2008. The letter of credit automatically renews for one year each December and the amount of coverage can be reduced as the principal balance decreases.

 

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San Jose Water Company purchases water from SCVWD under terms of a master contract expiring in 2051. Delivery schedules for purchased water are based on a contract year beginning July 1, and are negotiated every three years under terms of the master contract with SCVWD. For the years ending December 31, 2008, 2007 and 2006, San Jose Water Company purchased from SCVWD 22,500 million gallons ($41,500,000), 22,600 million gallons ($38,500,000) and 21,500 million gallons ($34,500,000), respectively. Based on current prices and estimated deliveries, San Jose Water Company expects to purchase from SCVWD a minimum of 90% of the delivery schedule, or 23,700 million gallons ($45,000,000) of water at the current contract water rate of $1,903 per million gallons in the contract year ending June 30, 2009. Additionally, San Jose Water Company purchases non-contract water from SCVWD on an “as needed” basis if the water supply is available from SCVWD. The contract water rates are determined by SCVWD. These rates are adjusted periodically and coincide with SCVWD’s fiscal year, which ends annually on June 30. The contract water rates for SCVWD’s fiscal year ended 2009, 2008 and 2007 were $1,903, $1,765 and $1,642, per million gallons, respectively.

San Jose Water Company also pumps water from the local groundwater basin. There are no delivery schedules or contractual obligations associated with the purchase of groundwater. SCVWD determines the groundwater extraction charge and it is applied on a per unit basis. In addition to the SCVWD groundwater extraction charge, San Jose Water Company also incurs power costs to pump the groundwater from the basin.

San Jose Water Company sponsors a noncontributory defined benefit pension plan and provides health care and life insurance benefits for retired employees. In 2008, San Jose Water Company contributed $3,000,000 to the pension plan. In 2009, San Jose Water Company expects to make a contribution of $3,300,000 and $394,000 to the pension plan and other post retirement benefit plan, respectively. The amount of required contributions for years thereafter is not actuarially determinable.

San Jose Water Company’s other benefit obligations include employees’ and directors’ postretirement contracts, an Executive Supplemental Retirement Plan and an Executive Special Deferral Election Plan. Under these benefit plans, San Jose Water Company is committed to pay approximately $365,000 annually to former officers and directors. Future payments may fluctuate depending on the life span of the retirees and as current officers and executives retire.

CLWSC purchases water from GBRA under terms of agreements expiring in 2044 and 2050. The agreements, which are take-or-pay contracts, provide CLWSC 6,000 acre-feet per year of water supply from GBRA. The water rate may be adjusted by GBRA at any time, provided they give CLWSC 60-day written notice on the proposed adjustment.

444 West Santa Clara Street, L.P.

SJW Land Company owns a 70% limited partnership interest in 444 West Santa Clara Street, L.P., a real estate limited partnership. A real estate development firm, which is partially owned by the Chairman of the Board of SJW Corp., owns the remaining 30% limited partnership interest. A commercial building is constructed on the property of 444 West Santa Clara Street, L.P. and is leased to an international real estate firm under a 12-year lease. The partnership is being accounted for under FIN46R.

Impact of Recent Accounting Pronouncements

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated Financial Statements.” SFAS 160 requires noncontrolling interests, previously referred to as minority interests, to be reported as a component of equity, net income and comprehensive income to be displayed for both the controlling and noncontrolling interests, along with other required disclosures and reconciliations. SFAS 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008. SJW Corp. has evaluated the impact of SFAS 160 and the effect is considered not material to SJW Corp.’s financial position, results of operations and cash flow.

 

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In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R (“SFAS 141R”), “Business Combinations.” SFAS 141R clarifies the information that a reporting entity provides in its financial reports about a business combination and it replaces SFAS 141. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SJW Corp. has evaluated the impact of SFAS 141R and the effect is considered not material to SJW Corp.’s financial position, results of operations and cash flow.

 

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. Future financing is subject to the exposure to changes in interest rates. 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 material 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.

 

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Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

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, 2008 and 2007, 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, 2008. In connection with our audits of the consolidated financial statements, we also have audited the 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 based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in note 5 to the consolidated financial statements, effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of internal control over financial reporting of the Company as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 6, 2009 expressed an unqualified opinion on the effective operation of internal control over financial reporting.

 

/s/ KPMG LLP
Mountain View, California
March 6, 2009

 

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Report of Independent Registered Public Accounting Firm

The Shareholders and Board of Directors

SJW Corp.:

We have audited SJW Corp.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). SJW Corp.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and board of directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, SJW Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of SJW Corp. and subsidiaries as of December 31, 2008 and 2007, 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, 2008, and our report dated March 6, 2009 expressed an unqualified opinion on those consolidated financial statements.

 

/s/ KPMG LLP
Mountain View, California
March 6, 2009

 

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SJW Corp. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

     December 31,
     2008    2007

Assets

     

Utility plant:

     

Land

   $ 8,134    5,695

Depreciable plant and equipment

     855,427    778,277

Construction in progress

     7,142    24,298

Intangible Assets

     8,040    8,040
           
     878,743    816,310

Less accumulated depreciation and amortization

     272,562    255,025
           
     606,181    561,285
           

Real estate investment

     88,000    88,029

Less accumulated depreciation and amortization

     5,511    3,834
           
     82,489    84,195
           

Current assets:

     

Cash and cash equivalents

     3,406    2,354

Accounts receivable:

     

Customers, net of allowances for uncollectible accounts of $279 in 2008 and $196 in 2007

     11,622    10,390

Income tax

     657    2,557

Other

     1,154    1,222

Accrued unbilled utility revenue

     12,896    12,654

Materials and supplies

     933    782

Prepaid expenses

     1,293    1,632
           
     31,961    31,591
           

Other assets:

     

Investment in California Water Service Group

     51,071    40,720

Unamortized debt issuance and reacquisition costs

     3,162    3,345

Regulatory assets

     73,778    44,712

Other

     2,235    1,478
           
     130,246    90,255
           
   $ 850,877    767,326
           

See accompanying notes to consolidated financial statements.

 

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SJW Corp. and Subsidiaries

CONSOLIDATED BALANCE SHEETS (Continued)

(in thousands, except share and per share data)

 

     December 31,
     2008    2007

Capitalization and Liabilities

     

Capitalization:

     

Shareholders’ equity:

     

Common stock, $0.521 par value; authorized 36,000,000 shares; issued and outstanding 18,452,447 shares in 2008 and 18,361,733 shares in 2007

   $ 9,611    9,564

Additional paid-in capital

     20,548    18,723

Retained earnings

     204,744    195,331

Accumulated other comprehensive income

     19,423    13,316
           

Total shareholders’ equity

     254,326    236,934

Long-term debt, less current portion

     216,613    216,312
           
     470,939    453,246
           

Current liabilities:

     

Line of credit

     18,400    5,000

Current portion of long-term debt

     705    622

Accrued groundwater extraction charges and purchased water

     5,256    5,595

Purchased power

     563    514

Accounts payable

     5,758    9,268

Accrued interest

     4,567    4,522

Accrued taxes

     855    791

Accrued payroll

     3,325    2,583

Other current liabilities

     3,894    4,059
           
     43,323    32,954
           

Deferred income taxes

     97,038    74,643

Unamortized investment tax credits

     1,675    1,735

Advances for construction

     74,787    74,518

Contributions in aid of construction

     114,082    100,649

Deferred revenue

     1,247    1,313

Postretirement benefit plans

     42,331    23,357

Other noncurrent liabilities

     5,455    4,911

Commitments and contingencies

       
           
   $ 850,877    767,326
           

See accompanying notes to consolidated financial statements.

 

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SJW Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

Years ended December 31 (in thousands, except share and per share data)

 

     2008     2007     2006  

Operating revenue

   $ 220,347     206,601     189,238  

Operating expense:

      

Operation:

      

Purchased water

     48,291     48,596     44,896  

Power

     7,559     7,532     5,170  

Groundwater extraction charges

     34,368     30,141     18,737  
                    

Total production costs

     90,218     86,269     68,803  

Administrative and general

     23,688     22,334     21,108  

Other

     16,390     14,907     15,095  

Maintenance

     13,123     11,628     10,189  

Property taxes and other nonincome taxes

     6,793     6,307     5,893  

Depreciation and amortization

     24,043     22,854     21,299  

Income taxes

     13,198     12,549     15,298  
                    

Total operating expense

     187,453     176,848     157,685  
                    

Operating income

     32,894     29,753     31,553  

Other (expense) income:

      

Interest on senior notes

     (12,358 )   (10,912 )   (9,292 )

Mortgage and other interest expense

     (2,369 )   (2,097 )   (1,833 )

Gain on sale of real estate investments, net of taxes of $567 in 2008 and $11,248 in 2006

     832         16,355  

Gain on the sale of utility property, net of taxes of $269

     392          

Dividends

     1,287     1,276     1,265  

Other, net

     783     1,303     533  
                    

Net income

   $ 21,461     19,323     38,581  
                    

Other comprehensive income (loss):

      

Unrealized income (loss) on investment, net of taxes of $4,244 in 2008, $1,529 in 2007 and $984 in 2006

     6,107     (2,201 )   1,415  

Minimum pension liability adjustment, net of taxes of $2,521 in 2006

             3,666  
                    

Other comprehensive income (loss)

     6,107     (2,201 )   5,081  
                    

Comprehensive income

   $ 27,568     17,122     43,662  
                    

Earnings per share

      

—Basic

   $ 1.17     1.05     2.11  

—Diluted

   $ 1.15     1.04     2.08  

Weighted average shares outstanding

      

—Basic

     18,410,122     18,334,352     18,275,505  

—Diluted

     18,609,836     18,552,228     18,528,896  

See accompanying notes to consolidated financial statements.

 

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SJW Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands, except share and per share data)

 

    Common Stock                      
    Number of
Shares
  Amount   Additional
Paid-in
Capital
  Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total
Shareholders’
Equity
 
           

Balances, December 31, 2005

  18,270,882   $ 9,516   $ 15,368   $ 160,588     $ 10,436     $ 195,908  

Cumulative effect of adoption of SAB 108 (see Note 1)

          (1,744 )       (1,744 )
                                       

Adjusted balances as of January 1, 2006

  18,270,882     9,516     15,368     158,844       10,436       194,164  

Net income

          38,581         38,581  

Other comprehensive income

           

Unrealized gain on investment, net of tax effect of $984

            1,415       1,415  

Reclassification of minimum pension liability to Regulatory Asset, net of tax effect of $2,521, in conjunction with the implementation of SFAS 158 (see Note 11)

            3,666       3,666  
                 

Comprehensive income

              43,662  

Stock-based compensation

        633     (223 )       410  

Exercise of stock options and similar instruments

  1,939     1     35         36  

Employee stock purchase plan

  8,948     5     231         236  

Dividends paid ($.57 per share)

          (10,326 )       (10,326 )
                                       

Balances, December 31, 2006

  18,281,769   $ 9,522   $ 16,267   $ 186,876     $ 15,517     $ 228,182  

Cumulative effect of adoption of FASB Interpretation No. 48 (see Note 5)

          444         444  
                                       

Adjusted balances as of January 1, 2007

  18,281,769     9,522     16,267     187,320       15,517       228,626  

Net income

          19,323         19,323  

Other comprehensive income

           

Unrealized loss on investment, net of tax effect of $1,529

            (2,201 )     (2,201 )
                 

Comprehensive income

              17,122  

Stock-based compensation

        655     (223 )       432  

Exercise of stock options and similar instruments

  65,223     34     1,316         1,350  

Employee stock purchase plan

  14,741     8     485         493  

Dividends paid ($.60 per share)

          (11,089 )       (11,089 )
                                       

Balances, December 31, 2007

  18,361,733     9,564     18,723     195,331       13,316       236,934  

Net income

          21,461         21,461  

Other comprehensive income

           

Unrealized gain on investment, net of tax effect of $4,244

            6,107       6,107  
                 

Comprehensive income

              27,568  

Stock-based compensation

        601     (173 )       428  

Exercise of stock options and similar instruments

  61,230     32     716         748  

Employee stock purchase plan

  17,807     9     487         496  

Issuance of stock to minority interest holder of CLWSC

  11,677     6     21         27  

Dividends paid ($.65 per share)

          (11,875 )       (11,875 )
                                       

Balances, December 31, 2008

  18,452,447     9,611     20,548     204,744       19,423       254,326  
                                       

See accompanying notes to consolidated financial statements.

 

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SJW Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31 (in thousands)

 

     2008     2007     2006  

Operating activities:

      

Net income

   $ 21,461     19,323     38,581  

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     24,043     22,854     21,299  

Deferred income taxes

     6,079     (1,778 )   10,773  

Stock-based compensation

     601     655     436  

Gain on sale of real estate investments, net of taxes

     (832 )       (16,355 )

Gain on sale of utility property, net of taxes

     (392 )        

Changes in operating assets and liabilities:

      

Accounts receivable and accrued unbilled utility revenue

     (1,406 )   (2,310 )   (1,570 )

Accounts payable, purchased power and other current liabilities

     (1,107 )   (731 )   1,488  

Accrued groundwater extraction charges and purchased water

     (339 )   1,352     260  

Accrued taxes

     542     (1,760 )   (1,697 )

Accrued interest

     45     652     253  

Accrued payroll

     892     (272 )   (95 )

Prepaid expenses and materials and supplies

     188     55     (176 )

Postretirement benefits

     713     1,921     478  

Other noncurrent assets and noncurrent liabilities

     (302 )   873     (9,016 )

Other changes, net

     1,606     1,197     (361 )
                    

Net cash provided by operating activities

     51,792     42,031     44,298  
                    

Investing activities:

      

Additions to utility plant

     (68,943 )   (73,217 )   (58,028 )

Additions to real estate investment

         (48,245 )   (12,718 )

Cost to retire utility plant, net of salvage

     (2,594 )   (1,160 )   (1,013 )

Payments for business acquisitions, net of cash acquired

             4,083  

Proceeds from sale of real estate investment

     3,304         33,632  

Proceeds from sale of utility property

     1,582          

Sale proceeds held in trust account

         31,261     (31,261 )
                    

Net cash used in investing activities

     (66,651 )   (91,361 )   (65,305 )
                    

Financing activities:

      

Cancellation of Canyon Lake Water Supply Corporation bonds

             (19,951 )

Borrowings from line of credit

     25,950     31,400     37,000  

Repayments of line of credit

     (12,550 )   (41,900 )   (21,500 )

Long-term borrowings

     1,069     53,500     18,855  

Repayments of long-term borrowings

     (685 )   (699 )   (334 )

Dividends paid

     (11,875 )   (11,089 )   (10,326 )

Exercise of stock options and similar instruments

     890     1,298     226  

Tax benefits realized from share options exercised

     381     545     10  

Receipts of advances and contributions in aid of construction

     15,025     17,016     13,443  

Refunds of advances for construction

     (2,294 )   (2,175 )   (2,026 )
                    

Net cash provided by financing activities

     15,911     47,896     15,397  
                    

Net change in cash and cash equivalents

     1,052     (1,434 )   (5,610 )

Cash and cash equivalents, beginning of year

     2,354     3,788     9,398  
                    

Cash and cash equivalents, end of year

   $ 3,406     2,354     3,788  
                    

Cash paid during the year for:

      

Interest

   $ 15,249     13,142     11,332  

Income taxes

   $ 6,304     15,018     17,158  

Supplemental disclosure of non-cash activities:

      

Accrued payables for additions to utility plant

   $ (2,626 )   2,849      

Decrease in real estate investments due to transfer to utility property

   $     3,035      

Utility property installed by developers

   $ 4,049          

See accompanying notes to consolidated financial statements.

 

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SJW CORP. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(Dollars in thousands, except share data)

Note 1.    Summary of Significant Accounting Policies

The accompanying consolidated financial statements include the accounts of SJW Corp. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in 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 non-current liabilities” in the Consolidated Balance Sheets.

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 CPUC and conform to generally accepted accounting principles for rate-regulated public utilities. Approximately 92% of San Jose Water Company’s revenues are derived from the sale of water to residential and business customers.

SJWTX, Inc., doing business as Canyon Lake Water Service Company (“CLWSC”), a wholly owned subsidiary, was incorporated in September 2005. On May 31, 2006, CLWSC purchased substantially all the assets of Canyon Lake Water Supply Corporation. CLWSC provides service to approximately 8,700 connections that serve approximately 36,000 residents in a service area comprising more than 153 square miles in the region between San Antonio and Austin, Texas, as of December 31, 2008.

SJW Land Company owned and operated parking facilities, which are located adjacent to San Jose Water Company’s headquarters and the HP Pavilion in San Jose, California, until December 15, 2006 when the real estate investments were sold to Adobe Systems Incorporated for an aggregate purchase price of $32,500. SJW Land Company also owns commercial properties, several undeveloped real estate properties, and warehouse properties in the states of California, Florida, Connecticut, Arizona, Texas and Tennessee and holds a 70% limited partnership interest in 444 West Santa Clara Street, L.P., which is accounted for under the Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (see Note 9).

Together, San Jose Water Company and CLWSC are referred to as “Water Utility Services.”

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 2008, 2007 and 2006 was $461, $527 and $458, respectively. Construction in progress was $7,142 and $24,298 at December 31, 2008 and 2007, respectively.

 

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The major components of depreciable plant and equipment as of December 31, 2008 and 2007 are as follows:

 

     2008    2007

Equipment

   $ 164,672    145,188

Transmission and distribution

     641,344    597,281

Office buildings and other structures

     49,411    35,808
           

Total depreciable plant and equipment

   $ 855,427    778,277
           

Depreciation is computed using the straight-line method over the estimated service lives of the assets, ranging from 5 to 75 years. The estimated service lives of depreciable plant and equipment are as follows:

 

     Useful Lives

Equipment

   5 to 35 years

Transmission and distribution plant

   35 to 75 years

Office buildings and other structures

   7 to 50 years

For the years 2008, 2007 and 2006, depreciation expense was approximately 3.5%, 3.6% and 3.6%, respectively, of the beginning of the year balance of depreciable plant for all years excluding certain items credited to depreciation expense. 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 utility plant for the years ended December 31, 2008, 2007 and 2006 was $22,067, $20,956 and $20,095, respectively.

Utility Plant 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, ranging from 5 to 70 years (see Note 6).

Real Estate Investments

Real estate investments are recorded at cost and consist primarily of land and buildings. The major components of real estate investments as of December 31, 2008 and 2007 are as follows:

 

     2008    2007

Land

   $ 22,381    22,369

Buildings and improvements

     65,388    65,429

Intangibles

     231    231
           

Total real estate investment

   $ 88,000    88,029
           

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from 5 to 39 years.

Land and buildings and improvements include assets held for lease of $86,641 as of December 31, 2008 and 2007. The following schedule shows the future minimum rental payments required under operating leases that have remaining noncancelable lease terms in excess of one year as of December 31, 2008:

 

Year ending December 31:    Rental
Payments

2009

   $ 3,598

2010

     3,192

2011

     3,204

2012

     2,641

2013

     2,370

Thereafter

     24,729

 

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Impairment of Long-Lived Assets

In accordance with the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the long-lived assets of SJW Corp. are reviewed for impairment when changes in circumstances or events require adjustments to the carrying values of the assets. Long-lived assets consist primarily of utility plant in service, real estate investments, intangible assets, and regulatory assets.

Financial Instruments

The carrying amount of SJW Corp.’s current assets and liabilities that are considered financial instruments approximates their fair value as of the dates presented due to the short maturity of the instruments (see Note 14). The fair market value of long-term debt is discussed in Note 4.

Investment in California Water Service Group

SJW Corp.’s investment in California Water Service Group is accounted for under SFAS 115, “Accounting for Marketable Securities,” as an available-for-sale marketable security. The investment is recorded on the Consolidated Balance Sheet at quoted market price with the change in unrealized gain or loss reported, net of tax, as a component of other comprehensive income.

Other Assets

Debt reacquisition costs are amortized over the term of the related debt. Debt issuance costs are amortized to interest expense in the Consolidated Statements of Income and Comprehensive Income.

Regulatory Assets and Liabilities

Generally-accepted accounting principles for water utilities include the recognition of regulatory assets and liabilities as permitted by Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation.” In accordance with SFAS No. 71, the Water Utility Services, to the extent applicable, 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 recognized in the ratemaking process in a period different from when the costs and credits are incurred. San Jose Water Company records regulatory assets for future revenues expected to be realized in customers’ rates when certain items are recognized as expenses for ratemaking purposes. The income tax temporary differences relate primarily to the difference between book and income tax depreciation on utility plant that was placed in service before CPUC adopted normalization for ratemaking purposes. Previously the tax effect was passed onto customers. In the future, when such timing differences reverse, San Jose Water Company believes it is probable that it will be able to include the impact of the deferred tax reversal in customer rates. The differences will reverse over the remaining book lives of the related assets. Although realization is not assured, management believes it is more likely than not that all of the regulatory asset will be realized. In addition, regulatory assets include items that are not recognized for ratemaking purposes, such as certain expenses related to postretirement benefits, accrued vacation obligation and asset retirement obligations which are expected to be recoverable in future customer rates.

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. San Jose Water Company continually evaluates the recoverability of regulatory assets by assessing whether the amortization of the balance over the remaining life can be recovered through expected and undiscounted future cash flows.

Regulatory liabilities reflect temporary differences provided at higher than the current tax rate, which will flow through to future ratepayers, and unamortized investment tax credits.

 

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Regulatory assets and liabilities are comprised of the following as of December 31:

 

     2008    2007

Regulatory assets:

     

Income tax temporary differences

   $ 10,927    12,135

Postretirement pensions and other medical benefits

     61,347    30,349

Other obligations

     3,876    4,089
           

Total regulatory assets

   $ 76,150    46,573
           

Regulatory liabilities:

     

Future tax benefits to ratepayers

   $ 2,372    1,861
           

Net Regulatory Assets included in Balance Sheet

   $ 73,778    44,712
           

Income Taxes

Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the effect of temporary differences between financial and tax reporting. Deferred tax assets and liabilities are measured using current tax rates in effect. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.

To the extent permitted by 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

In California, advances for construction received after 1981 are being refunded ratably over 40 years. Estimated refunds for the next five years and thereafter are shown below:

 

     Estimated Refunds

2009

   $ 2,256

2010

     2,211

2011

     2,209

2012

     2,204

2013

     2,204

Thereafter

     63,703

Contributions in aid of construction represent funds received from developers that are not refundable under applicable 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, unless specifically prescribed under treasury regulations.

Advances and contributions received subsequent to 1991 and prior to 1997 are included in state taxable income.

 

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Asset Retirement Obligation

SJW Corp.’s asset retirement obligation is recorded as a liability included in other non-current liabilities. It reflects principally the retirement costs of wells, which by law, must be remediated upon retirement. Retirement costs have historically been recovered through rates at the time of retirement. As a result, the liability is offset by a regulatory asset. For the years ended December 31, 2008 and 2007, the asset retirement obligation is as follows:

 

     2008     2007  

Retirement obligation

   $ 3,745     3,698  

Discount rate

     6 %   6 %

Present value

     1,023     1,000  

Deferred tax

     704     688  
              

Regulatory asset

   $ 1,727     1,688  
              

Revenue

SJW Corp. recognizes its regulated and nonregulated revenue when services have been rendered, in accordance with SEC Staff Accounting Bulletin 104, “Revenue Recognition.”

Metered revenue of the Water Utility Services include billings to customers based on meter readings plus an estimate of water used between the customers’ last meter reading and the end of the accounting period. The Water Utility Services read the majority of its customers’ meters on a bi-monthly basis and record its revenue based on its meter reading results. Unbilled revenue from the last meter reading date to the end of the accounting period is estimated based on the most recent usage patterns, production records and the effective tariff rates. Actual results could differ from those estimates, which would result in adjusting the operating revenue in the period which the revision to Water Utility Services estimates are determined. Operating revenue in 2008, 2007 and 2006 includes $4,612, $4,561 and $4,045, respectively, from the operation of the City of Cupertino municipal water system.

Revenues also include a surcharge collected from regulated customers that are paid to the CPUC. This surcharge is recorded in operating revenues and administrative and general expenses. For the years ended December 31, 2008, 2007 and 2006, the surcharge was $2,999, $2,708 and $2,505, respectively.

Revenue from San Jose Water Company’s nonregulated utility operations and billing or maintenance agreements are recognized when services have been rendered. Revenue from SJW Land Company is recognized ratably over the term of the leases.

Balancing Account

For California, the CPUC has established a balancing account mechanism for the purpose of tracking the under-collection or over-collection associated with expense changes and the revenue authorized by CPUC to offset those expense changes. Since the balances have to be approved by CPUC before they can be incorporated into rates, San Jose Water Company does not recognize the balancing account in its revenue until CPUC authorizes the change in customers’ rates. As of December 31, 2008 and 2007, the total accrued in San Jose Water Company’s balancing account was an over-collection of $1,977 and $1,656, respectively, including interest.

Pension Accounting

In September 2006, the Financial Accounting Standards Board issued FASB Statement No. 158 (“Statement 158”), “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans.” As of December 31, 2006, SJW Corp. adopted Statement 158. Statement 158 requires employers to recognize on their balance sheets the funded status of pensions and other postretirement benefit plans based on the projected benefit obligations.

 

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Share-Based Payment

SJW Corp. utilizes the Black-Scholes option-pricing model, which requires the use of subjective assumptions, to compute the fair value of options at grant date, the fair value of options granted and is the basis for the share-based compensation for financial reporting purposes. In addition, SJW Corp. estimates forfeitures for the share-based awards that are not expected to vest.

Maintenance Expense

Planned major maintenance projects are charged to expense as incurred. SJW Corp. does not accrue maintenance costs prior to periods in which they are incurred.

Earnings per Share

Basic earnings per share is calculated using income available to common shareholders, divided by the weighted average number of shares outstanding during the year. Diluted earnings per share is calculated 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. Anti-dilutive restricted common stock units and stock options of 2,909, 146 and 104 as of December 31, 2008, 2007 and 2006, respectively, were excluded from the dilutive earnings per share calculation.

Note 2.    Capitalization

SJW Corp. is authorized to issue 36,000,000 shares of common stock of $0.521 par value per share. At December 31, 2008 and 2007, 18,452,447 and 18,361,733, respectively, shares of common stock were issued and outstanding.

At December 31, 2008 and 2007, 176,407 shares of preferred stock of $25 par value per share were authorized and 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 $35,000. This line of credit bears interest at variable rates and expires on June 1, 2010. As of December 31, 2008 and 2007, SJW Corp. has an outstanding balance on the line of credit of $18,400 and $5,000, respectively. Cost of borrowing averaged 3.68% and 6.19%, respectively, as of December 31, 2008 and 2007.

San Jose Water Company issued two standby letters of credit with a commercial bank in the amount of $3,000 in support of its Safe Drinking Water State Revolving Fund (“SDWSRF”) loans which was funded in 2005 and 2008. The letters of credit automatically renews for one year each December unless the issuing bank elects not to renew it, and the amount of coverage can be reduced as the loan principal balance decreases.

 

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Note 4.    Long-Term Debt

Long-term debt as of December 31 was as follows:

 

Description

   Due Date    2008    2007

Senior notes, San Jose Water Company:

        

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    20,000

H 5.71%

   2037      20,000    20,000

I 5.93%

   2037      20,000    20,000

SJWTX, Inc. Series A 6.27%

   2036      15,000    15,000
              

Total senior notes

      $ 185,000    185,000
              

Mortgage loans 5.61% - 6.09%

   2017      25,601    26,081

444 West Santa Clara Street, L.P. 7.80% (non-recourse to SJW Land Company)

   2011      3,905    4,006

SDWSRF loans 2.39% and 2.60%, San Jose Water Company

   2027      2,812    1,847
              

Total debt

      $ 217,318    216,934

Less: Current portion

        705    622
              

Total long-term debt, less current portion

      $ 216,613    216,312
              

Senior notes held by institutional investors are unsecured obligations of San Jose Water Company and SJWTX, Inc. (“SJWTX”) and require interest-only payments until maturity. To minimize issuance costs, all of the companies’ 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 12-calendar month period would be less than 175% of interest charges.

The senior note agreement of SJWTX has terms and conditions that restrict SJWTX 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 12-calendar month period would be less than 175% of interest charges. In addition, SJW Corp. is a guarantor of the senior note which has terms and conditions that restrict SJW Corp. from issuing additional funded debt if (1) the funded debt exceeds 66-2/3% of total capitalization, and (2) the minimum net worth of SJW Corp. becomes less than $125,000 plus 30% of the Water Utility Services cumulative net income since December 31, 2005. As of December 31, 2008, SJW Corp. does not face any restrictions in issuing any future indebtedness as a result of these terms and conditions.

 

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The mortgage loans, which are the obligations of SJW Land Company, are due in 2013, 2016 and 2017. These loans amortize over 25 years, are secured by four leased properties and carry a fixed interest rate with 120 monthly principal and interest payments. The loan agreements generally restrict the company from prepayment in the first three years and require 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

2009

   1,992    1,481    511

2010

   1,992    1,450    542

2011

   1,992    1,418    574

2012

   1,992    1,385    607

2013

   9,096    1,086    8,010

Thereafter

   17,962    2,605    15,357

444 West Santa Clara Street, L.P., in which SJW Land Company owns a 70% limited partnership interest, has a mortgage loan in the outstanding amount of $3,905 as of December 31, 2008. The mortgage loan is due in April 2011 and amortized over 25 years with a fixed interest rate of 7.8%. The loan is secured by the partnership’s real property and is non-recourse to SJW Land Company. An amortization schedule of the mortgage loan is as follows:

 

     Amortization Schedule

Year

   Total Payment    Interest    Principal

2009

   410    301    109

2010

   410    292    118

2011

   3,820    142    3,678

San Jose Water Company has two loans from the SDWSRF at a rate of 2.39% and 2.60%. The outstanding loan balances as of December 31, 2008 is $2,812. San Jose Water Company issued standby letters of credit with a commercial bank in the amount of $3,000 in support of these loans. The letters of credit automatically renew for one year each December unless the issuing bank elects not to renew it. The amount of coverage can be reduced as the principal balances decrease. An amortization schedule of the SDWSRF loans is as follows:

 

     Amortization Schedule

Year

   Total Payment    Interest    Principal

2009

   196    69    127

2010

   196    66    130

2011

   196    63    133

2012

   196    60    136

2013

   196    56    140

Thereafter

   2,529    383    2,146

The fair value of long-term debt as of December 31, 2008 and 2007 was approximately $206,845 and $238,005, respectively, using a discounted cash flow analysis, based on the current rates for similar financial instruments of the same duration.

 

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Note 5.    Income Taxes

The components of income tax expense were:

 

     2008     2007     2006

Current:

      

Federal

   $ 4,546     10,981     12,157

State

     3,409     3,346     3,616

Deferred:

      

Federal

     6,788     (1,148 )   8,768

State

     (709 )   (630 )   2,005
                  
   $ 14,034     12,549     26,546
                  

The following table reconciles income tax expense to the amount computed by applying the federal statutory rate of 35% to income before income taxes:

 

     2008     2007     2006  

“Expected” federal income tax

   $ 12,151     11,155     22,795  

Increase (decrease) in taxes attributable to:

      

State taxes, net of federal income tax benefit

     2,061     1,831     3,742  

Dividend received deduction

     (309 )   (313 )   (310 )

Other items, net

     131     (124 )   319  
                    
   $ 14,034     12,549     26,546  
                    

 

     2008    2007    2006

Income taxes included in operating expenses

   $ 13,198    12,549    15,298

Income taxes included in gain on sale of utility property

     269      

Income taxes included in gain on sale of real estate investments

     567       11,248
                
   $ 14,034    12,549    26,546
                

The components of the net deferred tax liability as of December 31 was as follows:

 

     2008    2007

Deferred tax assets:

     

Advances and contributions

   $ 15,992    15,463

Unamortized investment tax credit

     901    934

Pensions and postretirement benefits

     4,367    4,058

California franchise tax

     980    1,077

Other

     941    670
           

Total deferred tax assets

   $ 23,181    22,202

Deferred tax liabilities:

     

Utility plant

   $ 58,503    50,930

Pension and postretirement benefits

     25,004    12,370

Investment in stock

     18,684    14,440

Deferred gain-property transfer

     16,061    16,678

Debt reacquisition costs

     744    793

Other

     1,223    1,634
           

Total deferred tax liabilities

     120,219    96,845
           

Net deferred tax liabilities

   $ 97,038    74,643
           

 

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Based upon the level of historical taxable income and projections for future taxable income over the periods for 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.

SJW Corp. adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 (“FASB Interpretation 48”), “Accounting for Uncertainty in Income Taxes,” on January 1, 2007. As a result, SJW Corp. recognized a decrease in its liability for unrecognized tax benefits of approximately $444 which was recorded as an increase to the January 1, 2007, balance of retained earnings. The total amount of unrecognized tax benefits, before the impact of deductions for state taxes, excluding interest and penalties was $1,228 and $1,438 as of December 31, 2008 and 2007, respectively. The amount of tax benefits, net of any federal benefits for state taxes and inclusive of interest that would impact the effective rate, if recognized, is approximately $647 and $669 as of December 31, 2008 and 2007, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

Balance at December 31, 2007

   $  1,497  

Additions based on tax position related to the current year, including interest

     108  

Reductions for tax positions of prior year, including interest

     (262 )
        

Balance at December 31, 2008

   $ 1,343  
        

SJW Corp.’s policy is to classify interest and penalties associated with unrecognized tax benefits, if any, in tax expense. Accrued interest expense, net of the benefit of tax deductions which would be available on the payment of such interest, is approximately $68 as of December 31, 2008. SJW Corp. has not accrued any penalties for unrecognized tax benefits.

SJW Corp. anticipates that its unrecognized tax benefits balance will be reduced by approximately $174 within the next 12 months following December 31, 2008 due to the lapsing statute of limitations. Through December 31, 2008, since the adoption of FASB Interpretation 48, a cumulative reduction of $464 was recorded to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations.

SJW Corp. files U.S. federal income tax returns and income tax returns in various states. The open tax years for the jurisdictions in which SJW Corp. files are as follows:

 

Jurisdiction

   Years Open

Federal

   2005 – 2007

California

   2004 – 2007

Arizona

   2006 – 2007

Connecticut

   2005 – 2007

Florida

   2005 – 2007

Tennessee

   2007

Texas

   2005 – 2007

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 $1,240 primarily incurred in conjunction with 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 ranging from 5 to 70 years.

Amortization expense for the intangible assets was $299 for the year ended December 31, 2008, $299 for the year ended December 31, 2007 and $294 for the year ended December 31, 2006. Amortization expense for 2009, 2010, 2011, 2012 and 2013 is anticipated to be $299 per year.

 

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The costs of intangible assets as of December 31, 2008 and 2007 are as follows:

 

     2008    2007

Concession fees

   $ 6,800    6,800

Other intangibles

     1,240    1,240
           

Intangible assets

     8,040    8,040

Less: Accumulated amortization

     

Concession fees

     3,060    2,788

Other intangibles

     473    446
           

Net intangible assets

   $ 4,507    4,806
           

Note 7.    Commitments

San Jose Water Company purchases water from SCVWD. Delivery schedules for purchased water are based on a contract year beginning July 1 of each year, and are negotiated every three years under terms of a master contract with SCVWD expiring in 2051. For the years ending December 31, 2008, 2007 and 2006, San Jose Water Company purchased from SCVWD 22,500 million gallons ($41,500), 22,600 million gallons ($38,500) and 21,500 million gallons ($34,500), respectively, of contract water. Based on current prices and estimated deliveries, San Jose Water Company expects to purchase a minimum of 90% of the delivery schedule, or 23,700 million gallons ($45,000) of water at the current contract water rate of $1,903 per million gallons, from SCVWD in the contract year ending June 30, 2009. Additionally, San Jose Water Company purchases non-contract water from SCVWD on an “as needed” basis and if the water supply is available from SCVWD.

The contract water rates are determined by SCVWD. These rates are adjusted periodically and coincide with SCVWD’s fiscal year, which ends annually on June 30. The contract water rates, per million gallons, for SCVWD’s fiscal year ended 2009, 2008 and 2007 were $1,903, $1,765 and $1,642, respectively.

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. San Jose Water Company paid a one-time, up-front concession fee of $6,800 to the City of Cupertino which is amortized over the contract term. 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.

CLWSC has long-term contracts with the Guadalupe-Blanco River Authority (“GBRA”). The terms of the agreements expire in 2044 and 2050. The agreements, which are take-or-pay contracts, provide CLWSC with 6,000 acre-feet of water from Canyon Lake. The water rate may be adjusted by GBRA at any time, provided they give CLWSC 60 day’s written notice on the proposed adjustment.

As of December 31, 2008, San Jose Water Company had 342 employees, of whom 101 were executive, administrative or supervisory personnel, and of whom 241 were members of unions. On February 7, 2008, San Jose Water Company reached a two-year collective bargaining agreement with the Utility Workers of America, representing the majority of all employees, and the International Union of Operating Engineers, representing certain employees in the engineering department, covering the period from January 1, 2008 through December 31, 2009. Both groups are affiliated with the AFL-CIO. The agreements include a wage adjustment of approximately 3.3% for union workers for the calendar year 2009 and minor benefit modifications.

Note 8.    Contingency

SJW Corp. is subject to litigation incidental to its business. There are no pending legal proceedings to which SJW Corp. 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 SJW Corp.’s financial position, results of operations or cash flows.

 

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Note 9.    Partnership Interest

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 the Chairman of the Board of SJW Corp. A commercial building was constructed on the partnership property and is leased to an international real estate firm under a 12-year long-term lease.

The consolidated financial statements of SJW Corp. at December 31, 2008 and 2007 include the operating results of 444 West Santa Clara Street, L.P. Intercompany balances were eliminated. Minority interest of $64, $72 and $62 was included in other income in the Consolidated Statements of Income and Comprehensive Income at December 31, 2008, 2007 and 2006, respectively. Included in other non-current liabilities of SJW Corp.’s Consolidated Balance Sheet is minority interest of $15 and $23 at December 31, 2008 and 2007, respectively.

Note 10.    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 any three twelve consecutive month periods of employment. San Jose Water Company’s policy is to contribute the net periodic pension cost to the plans 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 Wachovia Securities, LLC. Investment guidelines set forth in the Investment Policy Statement (“IPS”) require that at least 25% of plan assets be invested in bonds. 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. Since the Pension Plan’s inception in 1984, the plan has achieved 10.1% return on their investments while the applicable benchmark was 11.1% for the same period. For the fiscal year 2008, the Investment Manager, following the required investment guidelines, achieved a (22.8%) loss on their investments, while the applicable benchmark was (22.7%) for the same period.

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 three-to-five-year period and/or full market cycle. These standards include a specific absolute and risk-adjusted performance standards over a three-to-five-year period and/or full market cycle.

General restrictions have been placed on the Investment Manager. They may not invest in commodities and futures contracts, private placements, options, letter stock, speculative securities, subprime mortgages, or hold more than 5% of assets of any one private corporation. They may only invest in bonds, commercial paper, and money market funds with acceptable ratings by Moody’s or Standard & Poor’s. The Investment Manager is reviewed regularly regarding performance by the Investment Consultant who provides at least quarterly reports to the committee for review.

San Jose Water Company has an Executive Supplemental Retirement Plan, which is a defined benefit plan under which San Jose Water 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 $7,585 and $6,791 as of December 31, 2008 and 2007, respectively, and net periodic pension cost of $780, $767 and $547 for 2008, 2007 and 2006, 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.

 

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Flexible Spending Plan

Effective February 1, 2004, San Jose Water Company established a Flexible Spending Account for its employees for the purpose of providing eligible employees with the opportunity to choose from among the fringe benefits available under the plan. The flexible spending plan is intended to qualify as a cafeteria plan under the provisions of the Internal Revenue Code Section 125. The flexible spending plan allows employees to save pre-tax income in a Health Care Spending Account (“HCSA”) and/or a Dependent Care Spending Account (“DCSA”) to help defray the cost of out-of-pocket medical and dependent care expenses. The annual maximum limit under the HCSA and DCSA plans is $2.5 and $5, respectively.

Medicare

In December 2003, federal legislation was passed reforming Medicare and introducing the Medicare Part D prescription drug program. San Jose Water Company determined that the new legislation has no impact on its postretirement benefit plan under SFAS No. 116, “Employers’ Accounting for Postretirement Benefits—Other Than Pensions.” Because San Jose Water Company has a union contract with its employees whereby San Jose Water Company provides medical benefits at a fixed cost to its retirees, San Jose Water Company’s medical costs for postretirement benefits would not be affected by cost fluctuations resulting from the Medicare Part D prescription drug program.

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 San Jose Water Company. San Jose Water Company contributions were $940, $896 and $846 in 2008, 2007 and 2006, respectively.

Executive Special Deferral Election Plan

SJW Corp. adopted an Executive Special Deferral Election Plan effective January 1, 2005, which was amended effective January 1, 2008. The plan allows certain executives and directors to defer a portion of their earnings each year and to realize an investment return on those funds during the deferral period. Executives and directors have to make an election on the distribution and payment method of the deferrals before services are rendered. San Jose Water Company records the investment return on the deferred funds as compensation expense once the deferrals are made. Executives and directors had deferred $1,489, $1,192 and $778 to the plan as of December 31, 2008, 2007 and 2006, respectively. San Jose Water Company recorded an investment return of $69, $52 and $37 as of December 31, 2008, 2007 and 2006, respectively, on the deferred funds as compensation expense.

Assumptions Utilized on Actuarial Calculations

Net periodic cost for the defined benefit plans and other postretirement benefits was calculated using the following weighted-average assumptions:

 

     Pension Benefits    Other Benefits
     2008    2007    2006    2008    2007    2006
   %    %    %    %    %    %

Discount rate

   6.50    6.00    5.75    6.50    6.00    5.75

Expected return on plan assets

   8.00    8.00    8.00    8.00    8.00    8.00

Rate of compensation increase

   4.00    4.00    4.00    N/A    N/A    N/A

 

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Benefit obligations for the defined benefit plans and other postretirement benefits were calculated using the following weighted-average assumptions as of December 31:

 

     Pension Benefits    Other Benefits
     2008    2007    2008    2007
   %    %    %    %

Discount rate

   6.06    6.50    6.20    6.50

Rate of compensation increase

   4.00    4.00    N/A    N/A

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 three-to-five-year period and/or full market cycle. As stated earlier, since the Pension Plan’s inception in 1984, the plan has achieved 10.1% return on their investments while the applicable benchmark was 11.1% for the same period. In 2008, the Investment Manager, following the required investment guidelines, achieved a (22.8%) loss on their investments, while the applicable benchmark was (22.7%) for the same period.

On August 17, 2006, the Pension Protection Act (the “Act”) was signed into law. The Act eliminates the scheduled expiration of changes to qualified pension plan rules that were enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”). These changes included increases to the amount of plan compensation taken into account for benefit purposes and to the maximum limit on benefits payable under pension plans. SJW Corp. evaluated the impact of the Act on its defined pension benefit plans and has determined that the effect is not considered material.

Net Periodic Pension Costs

Net periodic costs for the defined benefit plans and other postretirement benefits for the years ended December 31 was as follows:

 

     Pension Benefits     Other Benefits  
     2008     2007     2006     2008     2007     2006  

Components of Net Periodic Benefit Cost

            

Service cost

   $ 2,050     2,282     2,113     $ 176     193     172  

Interest cost

     4,248     3,946     3,525       353     328     306  

Expected return on assets

     (3,653 )   (3,445 )   (2,997 )     (121 )   (97 )   (79 )

Amortization of transition obligation

                   57     57     57  

Amortization of prior service cost

     411     451     467       151     166     173  

Recognized actuarial loss

     445     802     955                
                                        

Net periodic benefit cost

   $ 3,501     4,036     4,063     $ 616     647     629  
                                        

 

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Reconciliation of Funded Status

For the defined benefit plans and other postretirement benefits, the benefit obligation is the projected benefit obligation and the accumulated benefit obligation, respectively. 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  
     2008     2007     2008     2007  

Change in Benefit Obligation

        

Benefit obligation at beginning of year

   $ 66,146     65,992     $ 5,517     5,608  

Service cost

     2,050     2,282       176     193  

Interest cost

     4,248     3,946       353     328  

Amendments

     857                

Actuarial (gain) loss

     3,900     (3,690 )     266     (407 )

Benefits paid

     (2,571 )   (2,384 )     (234 )   (205 )
                            

Benefit obligation at end of year

   $ 74,630     66,146     $ 6,078     5,517  
                            

Change in Plan Assets

        

Fair value of assets at beginning of year

   $ 46,555     43,939     $ 1,418     1,124  

Actual return on plan assets

     (10,669 )   2,699       39     52  

Employer contributions

     3,330     2,301           362  

Benefits paid

     (2,571 )   (2,384 )     (161 )   (120 )
                            

Fair value of plan assets at end of year

     36,645     46,555       1,296     1,418  
                            

Funded status at end of year

   $ (37,985 )   (19,591 )   $ (4,782 )   (4,099 )
                            

The amounts recognized on the balance sheet as of December 31 were as follows:

 

     Pension Benefits    Other Benefits
     2008    2007    2008    2007

Current liabilities

   $ 393    333      46   

Noncurrent liabilities

     37,595    19,258    $ 4,736    4,099
                       
   $ 37,988    19,591    $ 4,782    4,099
                       

Upon implementation of Statement 158, San Jose Water Company recorded a regulatory asset, including a gross-up for taxes, on the projected benefit obligation of the postretirement benefit plans. The following table summarizes the change in regulatory assets:

 

     2008     2007  

Funded status of obligation

   $ 42,767     23,690  

Accrued benefit cost

     (6,424 )   (5,711 )
              

Amount to be recovered in future rates

     36,343     17,979  

Tax gross-up

     25,004     12,370  
              

Regulatory asset

   $ 61,347     30,349  
              

The estimated amortization for the year ended December 31, 2009 is as follows:

 

     Pension Benefits    Other Benefits

Amortization of prior service cost

   $ 448      —  

Amortization of loss

     1,760   
           

Total

   $ 2,208   
           

 

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Plan Assets

Plan assets for the years ended December 31 were as follows:

 

       Pension Benefits     Other Benefits  
       2008     2007     2008     2007  

Fair value of assets at end of year:

          

Debt securities

     $ 16,590     18,120            
       45.3 %   38.9 %          

Equity securities

     $ 18,990     27,731            
       51.8 %   59.6 %          

Cash and equivalents

     $ 1,065     704     $ 1,296     1,418  
       2.9 %   1.5 %     100 %   100 %
                              

Total

     $ 36,645     46,555     $ 1,296     1,418  
                              

In 2009, San Jose Water Company expects to make a contribution of $3,300 and $394 to the pension plan and other post retirement benefit plan, respectively.

Benefits expected to be paid in the next five years are:

 

     Pension Plan    Other Postretirement
Benefit Plan

  2009

   $ 2,908    $ 225

  2010

     3,067      242

  2011

     3,387      272

  2012

     3,636      312

  2013

     4,058      344

2014 – 2018

     24,967      2,218

Note 11.    Long-Term Incentive Plan and Share-Based Payments

Common Shares

SJW Corp. has a Long-Term Stock Incentive Plan (the “Plan”), which has 1,800,000 common shares reserved for issuance. The Plan was initially adopted by the Board of Directors on March 6, 2002. The Plan was subsequently amended, and the new amended and restated Plan was adopted by the Board on January 30, 2008 and became effective on April 30, 2008. The Plan allows SJW Corp. to provide employees, non-employee Board members or the Board of Directors, consultants, and other independent advisors who provide services to the company or any parent or subsidiary the opportunity to acquire an equity interest in SJW Corp. The special incentive compensation programs previously established for the non-employee Board members under the Plan, namely, the Deferral Election Program and Deferred Restricted Stock Program, each amended effective January 1, 2008, shall continue in effect under the Plan.

A participant in the Plan generally may not receive Plan awards covering an aggregate of more than 600,000 common shares in any calendar year. Additionally, awards granted under the Plan may be conditioned upon the attainment of specified performance goals. The types of awards included in the Plan are restricted stock awards, restricted stock units, performance shares, or other stock-based awards. In addition, shares are issued under the Employee Stock Purchase Plan (ESPP). As of December 31, 2008, 2007 and 2006, 150,866, 87,700 and 20,001 shares have been issued pursuant to the Plan, and 340,186, 367,404 and 400,659 shares are issuable upon the exercise of outstanding options, restricted stock units, and deferred restricted stock units for the years ended 2008, 2007 and 2006, respectively. The remaining shares available for issuance under the Plan are 1,308,948, 1,344,896, and 1,379,340 for the years ended 2008, 2007 and 2006, respectively. The compensation costs

 

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charged to income was recognized on a straight-line basis over the requisite service period. The total compensation costs charged to income under the Plan were $601, $655 and $436 for 2008, 2007 and 2006, respectively. A summary of compensation costs charged to income, the exercise of stock options and similar instruments and the tax benefit realized from share options exercised, by award type, are presented below for the three years ended December 31, 2008, 2007 and 2006:

 

     2008    2007    2006

Compensation costs charged to income:

        

Stock options

   $ 58    105    130

Restricted stock and deferred restricted stock

     543    550    306
                

Total compensation costs charged to income

   $ 601    655    436
                

Exercise of stock options and similar instruments:

        

Stock options

   $ 243    648    25

ESPP

     496    485    201

Restricted stock and deferred restricted stock

     123    165   

Other

     28      
                

Total exercise of stock options and similar instruments

   $ 890    1,298    226
                

Tax benefits realized from share options exercised:

        

Stock options

   $ 80    395    10

Restricted stock and deferred restricted stock

     301    150   
                

Total tax benefits realized from share options exercised

   $ 381    545    10
                

Stock Options

SJW Corp. has adopted Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (Statement 123R) since 2006, for all existing and new share-based compensation plans in accordance with the modified prospective transition method. Previously, SJW Corp. followed SFAS 123, Accounting for Stock-Based Compensation (Statement 123), in accounting for its share-based compensation plans. To estimate the fair value of options at grant date as the basis for the stock-based compensation awards, SJW Corp. utilizes the Black-Scholes option-pricing model, which requires the use of subjective assumptions. Further, as required under Statement 123R, SJW Corp. estimates forfeitures for the share-based awards that are not expected to vest. Changes in these inputs and assumptions can affect the measure of estimated fair value of our share based compensation.

Awards in the form of stock option agreements under the 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 the grant. Options vest at a 25% rate on each annual date over four years and are exercisable over a 10 year period.

No options were granted for the years ending December 31, 2008, 2007 and 2006. For the years ended 2008, 2007 and 2006, options covering 17,020, 45,794 and 1,858 shares of common stock and options covering 4,704, 5,849 and 81 shares of common stock from vested dividend equivalent rights were exercised, respectively.

SFAS 123R requires the cash flows resulting from the tax benefits for tax deduction in excess of the compensation expense recorded for those options (excess tax benefits) to be classified as cash from financing activities. For the years ended December 31, 2008, 2007 and 2006, total cash received on exercise of options amounted to $327, $1,072 and $36 and the tax benefit realized from stock options exercised amounted to $80, $395 and $10. Shares subject to outstanding options under the Plan were 85,166, 116,348 and 162,142 as of December 31, 2008, 2007 and 2006, respectively.

 

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For the year ended 2008, after taking into consideration the relevant facts and circumstances, SJW Corp. does not project any foreseeable terminations which could lead to forfeiture of unvested options. SJW Corp. has recognized share based compensation expense of $58, $105 and $130 for the stock options granted under the Incentive Plan for the years ended December 31, 2008, 2007 and 2006, respectively.

Stock Options

 

     Shares     Weighted
Average Exercise
Price
   Weighted
Average
Remaining
Life In Years
   Aggregate
Intrinsic
Value

Outstanding as of January 1, 2006

   165,902     $ 16.38    8.20    $ 1,056,796

Granted

       $        

Exercised

   (1,858 )   $ 14.12        

Forfeited

   (1,902 )            
              

Outstanding as of December 31, 2006

   162,142     $ 16.40    7.18    $ 3,624,737
              

Granted

                

Exercised

   (45,794 )   $ 14.13        

Forfeited

                
              

Outstanding as of December 31, 2007

   116,348     $ 17.30    6.49    $ 2,020,924
              

Granted

                

Exercised

   (17,020 )     14.28        

Forfeited

                
              

Outstanding as of December 31, 2008

   99,328     $ 17.82    5.65    $ 1,204,024
              

Options exercisable at December 31, 2008

   85,166     $ 17.44    5.56    $ 1,064,900
              

Range of exercise prices

     $ 14.00 – 27.69      

Weighted-average fair value of options granted during
the year

                

A summary of the status of SJW Corp.’s nonvested stock options as of December 31, 2008 and changes during the three years ended December 31, 2008, are presented below:

 

     Shares     Weighted
Grant-Date
Fair Value

Nonvested as of January 1, 2006

   125,540     $ 2.02

Granted

        

Vested

   (41,272 )   $ 2.19

Forfeited

   (1,902 )   $ 1.46
        

Nonvested as of December 31 2006

   82,366     $ 1.95
        

Granted

        

Vested

   (41,267 )   $ 3.16

Forfeited

        
        

Nonvested as of December 31, 2007

   41,099     $ 3.65
        

Granted

        

Vested

   (26,937 )   $ 3.42

Forfeited

        
        

Nonvested as of December 31, 2008

   14,162     $ 4.09
        

 

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As of December 31, 2008, total unrecognized compensation costs related to stock options amounted to $11. These costs are expected to be recognized over a weighted-average period of 0.58 years.

Restricted Stock and Deferred Restricted Stock Plans

Under SJW Corp.’s Amended and Restated Deferred Restricted Stock Program (the “Deferred Restricted Stock Program”), SJW Corp. granted deferred restricted stock units to non-employee Board members. This program was amended effective January 1, 2008. As a result of that amendment, no new awards of deferred restricted stock units were granted under the Deferred Restricted Stock Program with respect to service after December 31, 2007. In addition, SJW Corp.’s Deferral Election Program, as amended (the “Deferral Program”), includes retainer fees and meeting fees earned for the calendar year 2007 to be deferred into deferred restricted stock units. Prior to 2007, only retainer fees were allowed to be converted under the Deferral Program. The retainer fees and meeting fees are collectively referred to as the “Annual Service Fees.” For any post-2007 calendar year, the Annual Service Fees that are deferred were credited as a dollar amount to a deferred election account, and were no longer deferred into deferred restricted stock units.

On January 2, 2008, 2,180 deferred restricted stock units were granted to non-employee Board members pursuant to outstanding dividend equivalent rights.

On April 28, 2008 and May 9, 2008 a total of 34,512 shares of common stock were distributed to retired members of SJW Corp.’s Board of Directors. Additionally, SJW Corp. paid cash in the amount of $4 to settle the dividend equivalent rights earned for those shares with a lump-sum distribution arrangement. The tax benefit realized from the stock issuance was $158.

During 2008, 10,150 restricted stock units were granted to several executives of SJW Corp. and its subsidiaries. These units will vest in four equal successive installments upon completion of each year of service with no dividend equivalent rights. The restricted stock units were valued at market prices of $33.75, $28.80 and $27.01 per share at various dates of grant. Share-based compensation expenses are being recognized at grant date fair values of $31.32, $26.35 and $24.58 per unit over the vesting period beginning in 2008.

On January 25, 2008 and January 30, 2008, 5,833 of restricted stock units granted to a key employee of SJW Corp. in 2006 and 2007 were vested and issued, and the tax deduction available from realizing the stock issuance was less than the deferred tax asset previously recognized by $3.

On January 30, 2008, a total of 21,000 restricted and deferred restricted stock units were awarded to a key employee of SJW Corp., which includes 7,000 performance-based restricted stock units that will convert into shares of SJW Corp.’s common stock upon vesting at the end of a three year period if specific performance goals set are attained. These units do not include dividend equivalent rights. The fair value of the performance-based restricted award was estimated using the fair value of SJW Corp.’s common stock with the effect of market conditions and no dividend yield on the date of grant, and assumes the performance goals are probable of attainment. Share-based compensation expense is recognized at $11.71 per unit over approximately 2.5 years.

On December 29, 2008, the second annual installment of restricted stock units for 1,097 shares, granted to several executives of SJW Corp. in 2006, were vested, and the tax deduction available from realizing the stock issuance was less than the deferred tax asset previously recognized by $4.

As of December 31, 2008, 2007 and 2006, SJW Corp. has recognized an aggregate share-based compensation expense of $543, $550 and $306, respectively, related to restricted and deferred restricted stock awards to the employees. As of December 31, 2008, 2007 and 2006, SJW Corp. has recognized an aggregate share-based compensation expense of $0, $220, and $225, respectively, related to restricted and deferred restricted stock awards to the non-employee Board members of SJW Corp. As of December 31, 2008, 2007 and 2006, the tax benefit realized from restricted and deferred restricted stock awards amounted to $301, $150 and $0.

 

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Restricted and Deferred Restricted Stock

 

     Units     Weighted-
Average Issue
Price

Outstanding as of January 1, 2006

   194,186     $ 14.28

Issued

   23,646     $ 27.15

Exercised

        

Forfeited

        
        

Outstanding as of January 1, 2007

   217,832     $ 15.68
        

Issued

   28,742     $ 32.29

Exercised

   (15,308 )   $ 19.55

Forfeited

   (2,052 )   $ 38.76
        

Outstanding as of January 1, 2008

   229,214     $ 17.36
        

Issued

   31,150     $ 24.38

Exercised

   (38,355 )   $ 17.93

Forfeited

   (980 )   $ 33.45
        

Outstanding as of December 31, 2008

   221,029     $ 18.18
        

Shares vested as of December 31, 2008

   164,945     $ 15.47
        

A summary of the status of SJW Corp.’s nonvested restricted and deferred restricted stock plans as of December 31, 2008, and changes during the three year period ended December 31, 2008, are presented below:

 

     Units     Weighted
Grant-Date Fair
Value

Nonvested as of January 1, 2006

   49,677     $ 14.12

Granted

   23,646     $ 27.15

Vested

   (54,421 )   $ 14.87
        

Nonvested as of January 1, 2007

   18,902     $ 28.25
        

Granted

   28,742     $ 32.29

Vested

   (10,415 )   $ 38.76

Forfeited

   (2,052 )   $ 38.76
        

Nonvested as of January 1, 2008

   35,177     $ 29.64
        

Granted

   31,150     $ 24.38

Vested

   (9,263 )   $ 32.71

Forfeited

   (980 )   $ 33.45
        

Nonvested as of December 31, 2008

   56,084     $ 26.14
        

As of December 31, 2008, the total unrecognized compensation costs related to restricted and deferred restricted stock plans amounted to $950. This cost is expected to be recognized over a weighted-average period of 1.67 years.

Dividend Equivalent Rights

Under the Plan, holders of options, restricted stock and deferred restricted stock awards have the right to receive dividend rights each time a dividend is paid on common shares after the grant date. Stock compensation on dividend equivalent rights is recognized as a liability and recorded against retained earnings on the date dividends are issued.

 

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The Deferred Restricted Stock and Deferral Programs for non-employee Board members were amended as of January 1, 2008, and became effective on April 30, 2008 to allow the DERs’ with respect to the deferred shares to remain in effect only through December 31, 2017. Accordingly, the last DERs’ conversion into deferred restricted stock units will occur on the first business day in January 2018. Previously, no such time limitation was placed in the Deferral Program.

On January 2, 2008, the final dividend equivalent rights related to the 2004 option grants were converted to common stock units and 959 shares were credited into the participants’ option deferred stock unit accounts. Accordingly, on this same date, 4,704 shares of common stock attributed to the 2004 option grant were fully vested and issued under the Plan to participants. The tax benefit realized from the stock issuance was $42.

As of December 31, 2008, 2007 and 2006, a cumulative of 34,828, 29,050 and 21,296 dividend equivalent rights were converted, since inception, to deferred restricted stock awards, respectively. For the years ended December 31, 2008, 2007 and 2006, $173, $223 and $224 related to dividend equivalent rights was recorded against retained earnings and were accrued as a liability.

Employee Stock Purchase Plan

The ESPP allows eligible employees to purchase shares of SJW Corp’s common stock at 85% of the fair market value of shares on the purchase date. Under the ESPP, employees can designate up to a maximum of 10% of their base compensation for the purchase of shares of common stock, subject to certain restrictions. A total of 270,400 shares of common stock have been reserved for issuance under the ESPP.

Since its inception, there have been five purchase intervals. As of December 31, 2008, 2007 and 2006, a total of 17,807, 14,741 and 8,948 shares, respectively, have been issued under the ESPP. The ESPP has no look-back provisions. As of December 2008, 2007 and 2006, cash received from employees towards the ESPP amounted to $472, $424 and $179, respectively.

After considering the estimated employee terminations or withdrawals from the plan before the purchase date, for the years ended December 31, 2008, 2007 and 2006, SJW Corp. recorded expense of $75, $74 and $61 related to the ESPP.

As of December 31, 2008, total unrecognized compensation costs related to the semi-annual offering period that ends January 31, 2009, for the ESPP is approximately $8. This cost is expected to be recognized during the first quarter of 2009.

Note 12.    Sale of Real Estate Investments and Utility Property

On January 20, 2006, SJW Land Company and San Jose Water Company sold approximately one acre of property and a building for $2,850. SJW Corp. recognized a gain on the sale of the property of approximately $1,535, net of tax of approximately $1,056. On February 1, 2006, San Jose Water Company reinvested the proceeds by purchasing utility property at a purchase price of $2,668.

On December 15, 2006, SJW Land Company sold a 2.2 acre property and a 4.5 acre property located in San Jose, California for an aggregate purchase price of $32,500. SJW Corp. recognized a gain on sale of real estate investment of $14,820, net of tax of $10,192. On February 9, 2007, SJW Land Company reinvested the proceeds from the sale of real estate investment by purchasing approximately 54 acres of real estate investment property with an office and distribution facilities in Knoxville, Tennessee for approximately $47,625.

On November 21, 2008, San Jose Water Company sold approximately one-half acre of property for $1,500. SJW Corp. recognized a gain on the sale of real estate investment of $796, net of taxes of approximately $548.

 

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On April 17, 2006, San Jose Water Company entered into an agreement with Adobe Systems Incorporated (“Adobe”) for Adobe to purchase approximately one acre of property and buildings located in San Jose, California for a total purchase price of approximately $4,000. The transaction required approval by the CPUC since the property and buildings are utility plant assets. On October 2, 2008, the CPUC authorized San Jose Water Company to sell the property with approximately $1,525 of the proceeds being distributed to San Jose Water Company customers through a monthly surcredit for a period not to exceed one year. Subsequently on December 4, 2008, SJW Corp. recognized a gain on the sale of utility property of $392, net of taxes of approximately $269.

Note 13.    Segment and Nonregulated Businesses Reporting

SJW Corp. is a holding company with three subsidiaries: (i) San Jose Water Company, a water utility operation with both regulated and nonregulated businesses, (ii) SJW Land Company and its consolidated variable interest entity, 444 West Santa Clara Street, L.P., which operates commercial building rentals (“Real Estate Services”) and (iii) SJWTX, Inc. which is doing business as Canyon Lake Water Service Company, a regulated water utility located in Canyon Lake, Texas. In accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” SJW Corp. has determined that it has two reportable business segments. The first segment is that of providing water utility and utility-related services to its customers through SJW Corp.’s subsidiaries, San Jose Water Company and Canyon Lake Water Service Company, together referred to the “Water Utility Services.” The second segment is property management and investment activity conducted by SJW Land Company, the “Real Estate Services.”

SJW Corp.’s reportable segments have been determined based on information used by the chief operating decision maker. SJW Corp.’s chief operating decision maker is its President and Chief Executive Officer (“CEO”). The CEO reviews financial information presented on a consolidated basis that is accompanied by disaggregated information about operating revenue, net income and total assets, by subsidiaries.

The tables below set forth information relating to SJW Corp.’s reportable segments and distribution of regulated and nonregulated business activities within the reportable segments. Certain allocated assets, revenue and expenses have been included in the reportable segment amounts. Other business activity of SJW Corp. not included in the reportable segments is included in the “All Other” category.

 

     For twelve months ended December 31, 2008
     Water Utility Services    Real
Estate
Services
   All Other*     SJW Corp.
     Regulated    Non
regulated
   Non
regulated
   Non
regulated
    Regulated    Non
regulated
   Total

Operating revenue

   209,189    4,612    6,546        209,189    11,158    220,347

Operating expense

   179,980    3,794    2,995    684     179,980    7,473    187,453

Operating income (loss)

   29,209    818    3,551    (684 )   29,209    3,685    32,894

Net income (loss)

   19,779    758    1,437    (513 )   19,779    1,682    21,461

Depreciation and amortization

   22,044    322    1,677        22,044    1,999    24,043

Interest expense

   12,552       1,890    285     12,552    2,175    14,727

Income tax expense (benefit) in operations income

   12,009    520    910    (241 )   12,009    1,189    13,198

Assets

   710,284    5,521    83,239    51,833     710,284    140,593    850,877

 

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     For twelve months ended December 31, 2007
     Water Utility Services    Real
Estate
Services
   All Other*     SJW Corp.
     Regulated    Non
regulated
   Non
regulated
   Non
regulated
    Regulated    Non
regulated
   Total

Operating revenue

   195,444    4,560    6,486    111     195,444    11,157    206,601

Operating expense

   169,062    3,636    2,994    1,156     169,062    7,786    176,848

Operating income (loss)

   26,382    924    3,492    (1,045 )   26,382    3,371    29,753

Net income

   16,515    824    1,843    141     16,515    2,808    19,323

Depreciation and amortization

   20,935    320    1,592    7     20,935    1,919    22,854

Interest expense

   10,772    272    1,847    118     10,772    2,237    13,009

Income tax expense (benefit) in operations income

   11,206    561    1,081    (299 )   11,206    1,343    12,549

Assets

   636,220    5,836    84,493    40,777     636,220    131,106    767,326

 

     For twelve months ended December 31, 2006
     Water Utility Services    Real
Estate
Services
   All Other*     SJW Corp.
     Regulated    Non
regulated
   Non
regulated
   Non
regulated
    Regulated    Non
regulated
   Total

Operating revenue

   179,765    4,044    4,317    1,112     179,765    9,473    189,238

Operating expense

   149,990    3,209    2,403    2,083     149,990    7,695    157,685

Operating income (loss)

   29,775    835    1,914    (971 )   29,775    1,778    31,553

Net income (loss)

   21,941    630    16,104    (94 )   21,941    16,640    38,581

Depreciation and amortization

   20,069    320    831    79     20,069    1,230    21,299

Interest expense

   9,479    409    1,225    12     9,479    1,646    11,125

Income tax expense (benefit) in operations income

   14,504    436    887    (529 )   14,504    794    15,298

Assets

   585,693    6,110    70,856    43,883     585,693    120,849    706,542

 

* The “All Other” category includes Crystal Choice Water Service LLC, which was sold and liquidated in 2007 and, without regard to its subsidiaries, SJW Corp.

Note 14.    Fair Value Measurement

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements”, which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. It also applies under other accounting pronouncements that require or permit fair value measurements. The fair value hierarchy for disclosure of fair value measurements under SFAS 157 is as follows:

 

Level 1:    Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:    Quoted prices, other than quoted prices included in Level 1, that are observable for the assets or liabilities, either directly or indirectly.
Level 3:    Inputs that are unobservable for the assets or liabilities.

The following table summarizes the assets and liabilities measured at fair value on a recurring basis as required by SFAS 157, as of December 31, 2008:

 

     Balance as of
December 31, 2008
   Level 1    Level 2    Level 3

Assets:

           

Investment in California Water Service Group

   $ 51,071    $ 51,071      

 

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The FASB has also issued FASB Staff Positions (“FSP”) 157-1 and 157-2. FSP 157-1 amends SFAS 157 to exclude SFAS No. 13 “Accounting for Leases,” and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement. FSP 157-2 defers the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Nonfinancial assets and nonfinancial liabilities would include all assets and liabilities other than those meeting the definition of a financial asset or financial liability as defined in paragraph 6 of SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” FSP 157-2 defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of FSP 157-2. SJW Corp. has evaluated the impact of FSP 157-2 and has determined that it will not have a material impact on SJW Corp.’s financial position, results of operations or cash flows.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, provided the entity also elects to apply the provisions of SFAS 157. SJW Corp. has adopted SFAS 159 and have elected not to measure any additional financial instruments and other items at fair value. SJW Corp.’s adoption of SFAS 159 did not have a material impact on SJW Corp.’s financial position, results of operations or cash flows.

Note 15.    Subsequent Events

On January 13, 2009, SJW Land Company was informed that one of its tenants filed a Chapter 11 bankruptcy and intends to liquidate its operations through the United States bankruptcy court in Delaware. The tenant currently leases a 148,000 square foot office building and a 346,000 square foot distribution building from SJW Land Company in Knoxville, Tennessee under triple net leases. The leases have been paid through February 2009. Based on the applicable bankruptcy laws and court rules, the tenant will have a limited period of time to decide whether it will terminate its leases or sell its rights under the leases. In the event that the leases are terminated, SJW Land Company will incur all holding costs and will seek to re-lease the properties. SJW Corp. has reviewed the Tennessee properties for impairment in accordance with the requirements of SFAS No. 144 (see Note 1). Based upon our review, the carrying amount of the Tennessee properties does not exceed its fair value and as a result, no adjustment has been made to the carrying value.

On February 2, 2009, San Jose Water Company issued $10,000 of Senior Notes Series J, with an interest rate of 6.54%. Proceeds from the sales of Senior Notes Series J will be used to repay short-term borrowings.

On February 6, 2009, SJWTX, Inc. acquired from the City of Bulverde, Texas (“City”) and the GBRA, the right and obligation to provide water service within the retail water service area of the City, certain areas outside the City and substantially all of the retail water service assets of the GBRA associated with the GBRA’s existing facilities located within such service area. The agreements by which the GBRA had a long-term right to construct and operate a retail water system within such service area were also terminated. The purchase price for the assets is approximately $2,800 and $900 to the GBRA and City, respectively. With the addition of the City’s service area, CLWSC’s service area is now approximately 250 square miles.

 

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Note 16.    Unaudited Quarterly Financial Data

Summarized quarterly financial data is as follows:

 

     2008 Quarter Ended
     March    June    September    December

Operating revenue

   $ 41,253    60,058    69,507    49,529

Operating income

     5,770    9,532    11,465    6,127

Net income

     2,718    6,278    8,257    4,208

Comprehensive income

     3,451    2,787    11,975    9,355

Earnings per share:

           

—Basic

     0.15    0.34    0.45    0.23

—Diluted

     0.15    0.34    0.44    0.23

Market price range of stock:

           

—High

     34.20    32.46    29.97    29.94

—Low

     28.05    26.40    23.65    21.71

Dividend per share

     0.16    0.16    0.16    0.16

 

     2007 Quarter Ended
     March    June    September    December

Operating revenue

   $ 39,017    55,135    64,847    47,602

Operating income

     4,409    8,060    10,731    6,553

Net income

     2,122    5,406    8,011    3,784

Comprehensive income

     772    4,867    8,653    2,830

Earnings per share:

           

—Basic

     0.12    0.30    0.44    0.21

—Diluted

     0.11    0.29    0.43    0.20

Market price range of stock:

           

—High

     43.00    40.10    38.80    38.50

—Low

     33.74    28.48    28.19    31.62

Dividend per share

     0.15    0.15    0.15    0.15

 

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SJW CORP.

FINANCIAL STATEMENT SCHEDULE

Schedule II

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

Years ended December 31, 2008 and 2007

 

Description

   2008     2007  

Allowance for doubtful accounts:

    

Balance, beginning of period

   $ 195,851     176,686  

Charged to expense

     469,970     286,038  

Accounts written off

     (431,181 )   (305,052 )

Recoveries of accounts written off

     44,345     38,179  
              

Balance, end of period

   $ 278,985     195,851  
              

Reserve for litigation and claims:

    

Balance, beginning of period

   $ 271,822     170,000  

Charged to expense

     526,279     255,365  

Revision to accrual, due to settlements

     (25,280 )   (38,439 )

Payments

     (104,882 )   (115,104 )
              

Balance, end of period

   $ 667,939     271,822  
              

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

Item 9A. Controls and Procedures

Evaluation of Disclosure Control and Procedures

SJW Corp.’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of SJW Corp.’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, the “Exchange Act”), 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 SJW Corp.’s disclosure controls and procedures 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 SJW Corp. in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. SJW Corp. 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.

Management’s Report on Internal Control over Financial Reporting

SJW Corp.’s management is responsible for establishing and maintaining an adequate internal control structure over financial reporting and for an assessment of the effectiveness of internal control over financial reporting, as such items are defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act.

Management has utilized the criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to evaluate the effectiveness of internal control over financial reporting.

 

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SJW Corp.’s management has performed an assessment of the effectiveness of internal control over financial reporting as of December 31, 2008. Based on this assessment, management has concluded SJW Corp.’s internal control over financial reporting as of December 31, 2008 is effective.

KPMG LLP has audited the effectiveness of the company’s internal control over financial reporting as of December 31, 2008. Their report is included in Item 8 of this report.

Changes in Internal Controls

There has been no change in internal control over financial reporting during the fourth fiscal quarter of 2008 that has materially affected, or is reasonably likely to materially affect, the internal controls over financial reporting of SJW Corp.

 

Item 9B. Other Information

None.

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this item is contained in part under the caption “Officers of the Registrant” in Part I, Item 1, of this report, and the remainder is contained in SJW Corp.’s Proxy Statement for its 2009 Annual Meeting of Shareholders to be held on May 6, 2009 (the “2009 Proxy Statement”) under the captions “Proposal No. 1—Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance,” and is incorporated herein by reference.

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 available at the company’s website at http://www.sjwater.com. SJW Corp. intends to satisfy the disclosure requirements under Item 5.05 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.

Corporate Governance Guidelines and Board Committee Charters

The Corporate Governance Guidelines and the Charters for the board committees—the Audit Committee, Executive Compensation Committee, Real Estate Committee, and Nominating & Governance Committee—are available at the company’s website at http://www.sjwater.com. Shareholders may also request a free hard copy of the Corporate Governance Guidelines and the charters from the following address and phone number:

SJW Corp.

110 West Taylor Street

San Jose, CA 95110

Attn: Corporate Secretary

Phone: 800-250-5147

In 2008, SJW Corp. submitted an Annual CEO Certification to the New York Stock Exchange (“NYSE”), dated May 19, 2008 as required by Section 303A.12(a) of the NYSE Listed Company Manual.

SJW Corp. is filing as an exhibit to this Form 10-K for the year ended December 31, 2008, certifications pursuant to Sarbanes-Oxley Action Section 302 regarding the quality of its public disclosure.

 

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Item 11. Executive Compensation

The information required by this item is contained in the 2009 Proxy Statement under the captions “Compensation of Directors,” “Executive Compensation and Related Information,” “Compensation Committee Interlocks and Insider Participation,” and “Committee Reports” 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 2009 Proxy Statement under the captions “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 Transaction and Director Independence

The information required by this item is contained in the 2009 Proxy Statement under the caption “Certain Relationships and Related Transactions” and “Independent Directors” and is incorporated herein by reference.

 

Item 14. Principal Accountant Fees and Services

The information required by this item is contained in the 2009 Proxy Statement under the caption “Principal Independent Accountants’ Fees and Services” and is incorporated herein by reference.

 

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PART IV

 

Item 15. Exhibits and Financial Statement Schedules

 

     Page

(a)(1)    Financial Statements

  

Reports of Independent Registered Public Accounting Firm

   35

Consolidated Balance Sheets as of December 31, 2008 and 2007

   37

Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2008, 2007 and 2006

   39

Consolidated Statements of Changes in Shareholders’ Equity for the years ended
December  31, 2008, 2007 and 2006

   40

Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007
and 2006

   41

Notes to Consolidated Financial Statements

   42

(a)(2)    Financial Statement Schedule

  

Valuation and Qualifying Accounts and Reserves, Years ended December 31, 2008 and 2007

   67

All other schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.

(a)(3)    Exhibits required to be filed by Item 601 of Regulation S-K.

See Exhibit Index located immediately following 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.

 

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EXHIBIT INDEX

 

Exhibit No.

  

Description

3.1    Restated Articles of Incorporation of SJW Corp. Incorporated by reference to Exhibit 3.1 to Form 10-K for year ended December 31, 2001.
3.2    Certificate of Amendment of the Restated Articles of Incorporation of SJW Corp., as filed with the Secretary of State of the State of California on February 22, 2006. Incorporated by reference to Exhibit 3.1 to Form 8-K filed on February 27, 2006.
3.3    By-Laws of SJW Corp., as amended on April 26, 2007. Incorporated by reference to Exhibit 3.3 to Form 10-K for year ended December 31, 2007.
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.
10.1    Water Supply Contract, dated January 27, 1981, between San Jose Water Works and the Santa Clara Valley Water District, as amended. Incorporated by reference to Exhibit 10.1 to Form 10-K for the year ended December 31, 2001.
10.2    Limited Partnership Agreement of 444 West Santa Clara Street, L.P., entered into as of September 2, 1999, between SJW Land Company and Toeniskoetter & Breeding, Inc. Development. Incorporated by reference to Exhibit 10.18 to Form 10-Q for the quarter ended September 30, 1999.
10.3    Asset Purchase Agreement by and between SJWTX, Inc. to purchase the assets of Canyon Lake Water Supply Corporation, a Texas nonprofit water supply corporation, dated October 4, 2005. Incorporated by reference to Exhibit 10.1 to Form 10-Q for quarter ending September 30, 2005.
10.4    Form of Letter Amendment to SJW Corp. Director Pension Plan. Incorporated by reference as Exhibit 10.25 to Form 10-K for the year ended December 31, 2007. (2)
10.5    San Jose Water Company Executive Supplemental Retirement Plan, as amended and restated effective January 1, 2008. Incorporated by reference as Exhibit 10.7 to Form 10-K for the year ended December 31, 2007. (2)
10.6    First Amendment to San Jose Water Company Executive Supplemental Retirement Plan, effective July 23, 2008. Incorporated by reference as Exhibit 10.1 to Form 8-K filed on July 24, 2008. (2)
10.7    San Jose Water Company Cash Balance Executive Supplemental Retirement Plan, dated July 23, 2008. Incorporated by reference as Exhibit 10.2 to Form 8-K filed on July 24, 2008. (2)
10.8    SJW Corp. Long-Term Incentive Plan, as amended and restated January 30, 2008. Incorporated by reference as Exhibit 10.1 to Form 8-K filed on May 1, 2008. (2)
10.9    Chief Executive Officer Employment Agreement amended and restated, effective January 1, 2008. (1) (2)
10.10    Standard Form of Stock Option Agreement, as adopted by SJW Corp. Board of Directors on April 29, 2003. Incorporated by reference to Exhibit 10.22 to Form 10-Q for the quarter ended June 30, 2003. (2)
10.11    SJW Corp. Executive Officer Short-Term Incentive Plan, effective as of April 30, 2008. Incorporated by reference to Exhibit 10.2 to Form 8-K filed on May 1, 2008. (2)
10.12    SJW Corp. Executive Severance Plan, amended and restated, effective October 22, 2008. (1) (2)

 

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Exhibit No.

  

Description

10.13    SJW Corp. Executive Severance Plan, as amended and restated, effective January 1, 2009. (1) (2)
10.14    San Jose Water Company Special Deferral Election Plan, as amended and restated, effective January 1, 2008. (1) (2)
10.15    SJW Corp. Amended and Restated Deferred Restricted Stock Program, effective January 1, 2008. Incorporated by reference as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2008. (2)
10.16    SJW Corp. Deferral Election Program for Non-Employee Board Members, as amended and restated, effective January 1, 2008. Incorporated by reference as Exhibit 10.22 to Form 10-K for the year ended December 31, 2007. (2)
10.17    SJW Corp. Director Compensation and Expense Reimbursement Policies, amended and restated, effective as of January 1, 2008. Incorporated by reference as Exhibit 10.23 to Form 10-K for the year ended December 31, 2007. (2)
10.18    Form of Stock Option Dividend Equivalent Rights Agreement, effective as of January 1, 2008. (1) (2)
10.19    Chief Operating Officer Stock Option Dividend Equivalent Rights Agreement, as amended and restated effective as of January 1, 2008. (1) (2)
10.20    Restricted Stock Unit Issuance Agreement, amended and restated, effective as of July 1, 2008. Incorporated by reference as Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 2008. (2)
10.21    Deferred Restricted Stock Award Agreement, amended and restated, as of October 22, 2008. (1) (2)
10.22    Chief Executive Officer Restricted Stock Unit Issuance Agreement, amended and restated effective October 22, 2008. (1) (2)
10.23    Chief Executive Officer Restricted Stock Unit Issuance Agreement, amended and restated effective October 22, 2008. (1) (2)
10.24    Chief Executive Officer Restricted Stock Unit Issuance Agreement, amended and restated, effective October 22, 2008. (1) (2)
10.25    Chief Executive Officer Restricted Stock Unit Issuance Agreement, amended and restated effective October 22, 2008. (1) (2)
10.26    Chief Executive Officer Restricted Stock Unit Issuance Agreement, amended and restated, effective October 22, 2008. (1) (2)
10.27    Chief Executive Officer Restricted Stock Unit Issuance Agreement, amended and restated, effective October 22, 2008. (1) (2)
10.28    Form of Restricted Stock Unit Issuance Agreement Award, amended and restated, effective October 22, 2008. (1) (2)
10.29    Form of Restricted Stock Unit Issuance Agreement, amended and restated, effective October 22, 2008. (1) (2)
21.1    Subsidiaries of SJW Corp. as of December 31, 2008. (1)
23    Consent of Independent Registered Public Accounting Firm. (1)
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)

 

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Exhibit No.

  

Description

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.

 

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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: March 4, 2009   By  

/s/ Charles J. Toeniskoetter

    CHARLES J. TOENISKOETTER,
    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: March 4, 2009   By  

/s/ W. Richard Roth

    W. RICHARD ROTH,
   

President, Chief Executive Officer and

Member, Board of Directors

Date: March 4, 2009   By  

/s/ David A. Green

    DAVID A. GREEN,
    Chief Financial Officer and Treasurer
Date: March 4, 2009   By  

/s/ Bonnie J. Schmidt

    BONNIE J. SCHMIDT,
    Controller
Date: March 4, 2009   By  

/s/ Mark L. Cali

    MARK L. CALI,
    Member, Board of Directors
Date: March 4, 2009   By  

/s/ J. Philip DiNapoli

    J. PHILIP DINAPOLI,
    Member, Board of Directors
Date: March 4, 2009   By  

/s/ Douglas R. King

    DOUGLAS R. KING,
    Member, Board of Directors
Date: March 4, 2009   By  

/s/ Norman Y. Mineta

    NORMAN Y. MINETA,
    Member, Board of Directors
Date: March 4, 2009   By  

/s/ Charles J. Toeniskoetter

    CHARLES J. TOENISKOETTER,
    Member, Board of Directors

 

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Date: March 4, 2009   By  

/s/ Frederick R. Ulrich, Jr.

    FREDERICK R. ULRICH, JR.
    Member, Board of Directors
Date: March 4, 2009   By  

/s/ Robert A. Van Valer

    ROBERT A. VAN VALER,
    Member, Board of Directors

 

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