SJW CORP.
SJW CORP.
Annual Report 2011
Annual Report 2011
Dear Fellow Shareholder:
JW Corp. (“SJW”) and our fl agship utility, San Jose Water Company (“SJWC”), delivered solid fi nancial
results in 2011 despite wet weather, cool temperatures, and continued declines in water usage by our
S
SJWC customers.
For the last several years, SJW and SJWC results have been impacted by declining water usage. Regardless of
whether this stems from adverse weather patterns, economic conditions, or changing consumer behavior, the
combination of declining usage and SJWC’s growing capital requirements requires us to seek permission from
the California Public Utilities Commission to decouple sales from revenues through a Water Revenue Adjust-
ment Mechanism (“WRAM”). The intended effect of a revenue decoupling mechanism is to ensure that a util-
ity’s authorized revenue levels are achieved regardless of the level of customer usage.
Although a WRAM has been requested as part of SJWC’s general rate case fi ling for the years 2013 through
2015, the earliest that SJWC could implement a WRAM is January 1, 2013. Additionally, 2012 is the last
year of SJWC’s current general rate case and the rate relief provided in the last year of a general rate case has
historically been insuffi cient to offset escalating operating and other costs. Accordingly, unless SJWC customer
water usage returns to “normal” levels, SJW’s 2012 results may be adversely impacted.
While 2012 may be challenging, SJW’s key revenue and earnings drivers remain strong and growing. SJWC
has continued to make large investments to replace aging infrastructure and upgrade critical operating facili-
ties. Also, SJW’s Texas utility, SJWTX, Inc., is increasing its contribution to consolidated results by consistent
customer growth, orderly expansion of its regional service area, and improved operational effi ciencies.
We strongly believe that SJW’s regional operations represent a compelling, effi cient, and superior utility model.
Further, by developing innovative and effective solutions to water supply and water quality challenges, and
investing in our water systems and the people who run them, we are building SJW for the long run and prepar-
ing for signifi cant opportunities in the water sector.
The substantial investments we have made in our water systems provide a solid foundation for sustainable
earnings growth and optimal system performance benefi tting both shareholders and customers. Through the
diligent execution of our strategy, we are confi dent that SJW will continue to deliver consistent earnings and
dividend growth over the long term.
In closing, it is with deep respect and appreciation that SJW bids farewell to three departing board members —
Chuck Toeniskoetter, Phil DiNapoli, and Norm Mineta. Collectively, their business acumen, dedication, and
commitment contributed greatly to SJW’s growth and success. They are all exceptional gentlemen character-
ized by extraordinary integrity, intellect, and sound judgment. Everyone at SJW wishes them the very best in
their future endeavors.
W. Richard Roth, President and CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2011
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
(State or other jurisdiction of incorporation or organization)
110 West Taylor Street, San Jose, California
(Address of principal executive offices)
77-0066628
(I.R.S. Employer Identification No.)
95110
(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
Common Stock, $0.521 par value per share
Name of each exchange on which registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Securities registered pursuant to Section 12(g) of the Act: None
Act. Yes
No
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
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
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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
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
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
As of June 30, 2011, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $340
million 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
Common Stock, $0.521 par value per share
Outstanding at February 8, 2012
18,618,265
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement relating to the registrant’s Annual Meeting of Shareholders, to be held on April 25, 2012,
are incorporated by reference into Part III of this Form 10-K where indicated.
TABLE OF CONTENTS
PART I
Forward-Looking Statements .......................................................................................................................................
Item 1.
Business..........................................................................................................................................................
Risk Factors....................................................................................................................................................
Unresolved Staff Comments ..........................................................................................................................
Properties........................................................................................................................................................
Legal Proceedings ..........................................................................................................................................
Removed and Reserved..................................................................................................................................
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ........................................................................................................................................................
Selected Financial Data..................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations.........................
Quantitative and Qualitative Disclosures About Market Risk .......................................................................
Financial Statements and Supplementary Data..............................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................
Controls and Procedures.................................................................................................................................
Other Information...........................................................................................................................................
PART III
Directors, Executive Officers and Corporate Governance.............................................................................
Executive Compensation................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters......
Certain Relationships and Related Transactions, and Director Independence...............................................
Principal Accountant Fees and Services.........................................................................................................
PART IV
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Exhibits and Financial Statement Schedules..................................................................................................
Exhibit Index ....................................................................................................................................................................
Signatures .........................................................................................................................................................................
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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 its subsidiaries and the industries in which SJW Corp. and its subsidiaries operate and the
beliefs and assumptions of the management of SJW Corp. Such forward-looking statements are identified by words including
“expect”, “estimate”, “anticipate”, “intends”, “seeks”, “plans”, “projects”, “may”, “should”, “will”, and 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 report on Form 10-Q and reports on 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, to reflect any event or circumstance that may arise after the date of this report.
Item 1.
Business
General Development of Business
SJW Corp. was incorporated in California on February 8, 1985. SJW Corp. is a holding company with four 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,
California area. San Jose Water Company’s web site can be accessed via the Internet at http://
www.sjwater.com.
SJWTX, Inc., a wholly owned subsidiary of SJW Corp., was incorporated in the State of Texas in 2005.
SJWTX, Inc. is doing business as Canyon Lake Water Service Company (“CLWSC”). CLWSC is a
public utility in the business of providing water service to approximately 10,000 connections that serve
approximately 36,000 people. CLWSC’s service area comprises more than 243 square miles in western
Comal County and southern Blanco County in the growing region between San Antonio and Austin,
Texas. SJWTX, Inc. has a 25% interest in Acequia Water Supply Corporation. The water supply
corporation has been determined to be a variable interest entity within the scope of Financial Accounting
Standards Board (FASB) Accounting Standard Codification (ASC) Topic 810—“Consolidation” with
SJWTX, Inc. as the primary beneficiary, and as a result, it has been consolidated with SJWTX, Inc.
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.
Texas Water Alliance Limited (“TWA”), a wholly owned subsidiary of SJW Corp., is undertaking
activities that are necessary to develop a water supply project in Texas.
Together, San Jose Water Company, CLWSC and TWA 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 three types of rate adjustments that affect San Jose Water Company’s revenue collection: general
rate adjustments, cost of capital adjustments, and offset rate adjustments. General rate adjustments are authorized in general rate
case decisions, which usually authorize an initial rate adjustment followed by two annual escalation adjustments 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.
3
Cost of capital adjustments are rate adjustments resulting from the CPUC’s tri-annual establishment of a reasonable rate
of return for San Jose Water Company’s capital investments.
The purpose of an offset rate adjustment is to compensate utilities for changes 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.
On November 20, 2009, the CPUC approved the most recent general rate increase for San Jose Water Company. In
summary, the decision authorizes a rate increase designed to increase revenue by $18.6 million, or 9.24%, in 2010. In
accordance with CPUC rules, the subsequent increases for the years 2011 and 2012 are based upon the consumer price indices
published in October of the preceding year. The CPUC approved a 2011 general rate increase of $7.3 million, or 3.32%, and a
2012 general rate increase of $10.7 million, or 4.53%. These rate changes, which were designed to produce a return on common
equity of 10.20%, became effective on January 1, 2011 and 2012, respectively. The stated revenue increases for 2011 and 2012
do not include additional authorized increases associated with scheduled expense and rate base offset filings, rate recovery of
planned upgrades to the Montevina Treatment Plant, and the potential supplemental filings for rate recovery for investments in
alternative energy projects.
On June 2, 2010, San Jose Water Company filed an advice letter with the CPUC requesting authorization to increase
revenues by $5.7 million, or approximately 2.61%, of authorized revenue at the time of the filing. This increase was intended to
recover the accumulated balance in the Mandatory Conservation Revenue Adjustment Memorandum Account (“MCRAM”),
which was in effect from August 3, 2009 to May 1, 2010. The CPUC-authorized MCRAM was intended to track the revenue
impact of mandatory conservation upon San Jose Water Company’s quantity revenue resulting from mandatory conservation
instituted by the Santa Clara Valley Water District (“SCVWD”). As directed by the CPUC’s Division of Water and Audits, the
MCRAM would be recovered via a surcharge on the existing quantity rate for a period of 12 months following final approval
by the CPUC. Resolution W-4885 authorizing the recovery was adopted by the Commission on December 15, 2011. The
surcharge to begin recovering the balance was subsequently implemented on December 27, 2011. All revenue was recognized
immediately upon final approval by the CPUC.
On September 30, 2010, San Jose Water Company, in compliance with Commission Decision 09-11-032, requested the
CPUC’s approval of upgrades to San Jose Water Company’s 40-year old Montevina Water Treatment Plant (“MWTP”). The
MWTP treats surface water from the local watershed by direct media filtration and chlorine disinfection. Over the past 40 years,
state and federal drinking water regulations have changed significantly in areas that the MWTP was not designed to address.
The MWTP has aging infrastructure and many of its components are at the end of their useful lives, or they do not meet current
structural and seismic requirements. The total planned project cost is $73.7 million, over five years, with the project
commencing in late 2011. San Jose Water Company’s application requested revenue increases of $0.5 million, or 0.22% in
2011, $1.9 million, or 0.85% in 2012, $7.7 million, or 3.50% in 2013, $3.5 million, or 1.61% in 2014 and $0.8 million, or
0.38% in 2015 (all at the current authorized rate of return). A decision on the application is expected in the second half of 2012.
On May 2, 2011, San Jose Water Company filed Application No. 11-05-002 with the CPUC seeking authorization of an
updated Cost of Capital (“COC”) for the period from January 1, 2012 through December 31, 2014. For 2012, San Jose Water
Company is seeking CPUC approval of a return on equity of 11.50%, a long-term cost of debt of 6.68% and a rate of return of
9.14%. San Jose Water Company's application was subsequently consolidated with the COC application of three other Class A
water companies (California Water Service Company, California American Water and Golden State Water Company). A pre-
hearing conference was held on June 14, 2011. A scoping memo was issued on September 13, 2011. The CPUC's Division of
Ratepayer Advocates issued testimony on August 31, 2011 and San Jose Water Company issued rebuttal testimony on
September 21, 2011. An all-party settlement agreement was announced by the CPUC on October 17, 2011 that would provide
San Jose Water Company a return on equity of 9.99% and a rate of return of 8.38%. On November 28, 2011, the Administrative
Law Judge in the proceeding issued a ruling requiring evidentiary hearings to provide additional development of the evidentiary
record. These evidentiary hearings were held in January 2012. A CPUC decision on this application is expected during the
second quarter of 2012.
On May 31, 2011, San Jose Water Company filed an advice letter with the CPUC requesting authorization to increase
revenues by $9.2 million, or approximately 4.04%. This revenue increase was intended to offset the SCVWD's increases to
purchased water and groundwater extraction charges. This revenue increase was not intended to provide San Jose Water
Company an increase in earnings. This advice letter was approved by the CPUC and the revenue increase went into effect July
1, 2011.
On June 23, 2011, the CPUC approved Resolution L-411A. The resolution ordered many regulated utilities, including
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San Jose Water Company, to establish memorandum accounts to reflect the impacts of the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010, and offsetting reinvestment, if any, in utility plant. The Act provides for
between 50% and 100% bonus depreciation on qualifying assets placed in service between 2010 and 2012. The bonus
depreciation taken generates current tax savings and deferred tax liabilities associated with such assets and, as a result, reduces
utility rate base below that originally contemplated for rate setting purposes. Under L-411A, the memorandum account will
track the impact of this rate base reduction as well as the impact of newly constructed qualifying assets on the Company's
authorized revenue. On August 1, 2011, San Jose Water Company filed an advice letter with the CPUC requesting authorization
of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 memorandum account. The
memorandum account was subsequently approved on August 18, 2011, with an effective date of April 14, 2011.
On January 3, 2012, San Jose Water Company filed a General Rate Case application requesting rate increases of $47.4
million, or 21.51% in 2013, $13.0 million, or 4.87% in 2014 and $34.8 million, or 12.59% in 2015. This General Rate Case
filing also includes several “special requests”, including but not limited to: (1) recovery of the under-collected balance of $2.6
million in the balancing account, (2) disbursement of the over-collected balance of $0.7 million accrued in various
memorandum accounts and (3) implementation of a full revenue decoupling Water Revenue Adjustment Mechanism and
associated Modified Cost Balancing Account. A General Rate Case is a year-long proceeding before the CPUC that involves a
discovery phase led by the CPUC's Division of Ratepayer Advocates, settlement meetings, as well as possible evidentiary
hearings. A final decision in this proceeding is likely to occur in the second half of 2012 with new rates becoming effective at
the beginning of 2013. If a decision is not reached by the end of 2012, the CPUC has mechanisms in place that will allow San
Jose Water Company to request interim rates, effective January 1, 2013, until a decision is adopted.
CLWSC is subject to regulation by 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 anytime but not sooner than
12 months following acceptance by the TCEQ of the previous filing.
On August 27, 2010, CLWSC filed a rate case with the TCEQ. The filing contained a request for an immediate increase
in revenue of 38% and a total increase of 71%. The new rates (38%) became effective on October 27, 2010. CLWSC is also
requesting the TCEQ for a rate base determination. A rate base determination entails verification of plant to be included in rate
base by TCEQ staff. An evidentiary hearing on these matters has been scheduled for March 2012, and a TCEQ decision is
expected sometime in the second quarter of 2012. Until final approval by the TCEQ, the 38% rate increase in October 2010 is
subject to adjustment and refund.
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 Note 12 of Notes to Consolidated Financial Statements for information regarding SJW Corp.’s business segments.
Description of Business
General
The principal business of Water Utility Services consists of the production, purchase, storage, purification, distribution,
wholesale, 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 territories, all in the County of Santa Clara in the State of California. San
Jose Water Company distributes water to customers in accordance with accepted water utility methods. CLWSC provides water
service to approximately 10,000 connections that serve approximately 36,000 people in a service area comprising more than
243 square miles in the growing region between San Antonio and Austin, Texas.
San Jose Water Company also provides non-tariffed services under agreements with municipalities and other utilities.
These non-tariffed services include water system operations, maintenance agreements and antenna leases.
In October 1997, San Jose Water Company commenced operation of the City of Cupertino municipal water system
under the terms of a 25-year lease. The system is adjacent to the 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 Water Utility Services’ service
areas. Revenue, production costs and income are affected by the changes in water sales and availability of surface water supply.
5
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 demand, warm 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 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. San Jose Water
Company pumps approximately 40% to 50% of its water supply from the underground basin and pays a groundwater extraction
charge to SCVWD. 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.
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 32 of its strategic water production
sites. In addition, the commercial office and operations control centers are outfitted with standby power equipment 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 purchased water from
SCVWD.
In 2011, the level of water in the Santa Clara Valley groundwater basin, which is managed by the SCVWD, remained
comparable to the 30-year average level. On January 1, 2012, SCVWD’s 10 reservoirs were 44.3% full with 74,797 acre-feet of
water in storage. As reported by SCVWD, the rainfall was approximately 33% of the seasonal average for the first six months
of the rainfall season that commenced on July 1, 2011 and ends on June 30, 2012. As of December 31, 2011, San Jose Water
Company’s Lake Elsman contained 111 million gallons. In addition, the rainfall at San Jose Water Company’s Lake Elsman was
measured at 5.02 inches for the period from July 1, 2011 through December 31, 2011, which is 34% of the five-year average.
Local surface water is a less costly source of water than groundwater or purchased water and its availability significantly
impacts San Jose Water Company’s results of operations. San Jose Water Company believes that its various sources of water
supply will be sufficient to meet customer demand in 2012.
On December 15, 2008, the U.S. Fish and Wildlife Service issued a Biological Opinion (“BiOp”) and Incidental Take
Statement for the Central Valley Project (“CVP”) and the State Water Project (“SWP”) on the Delta smelt. 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 and United States Bureau of Reclamation 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. In addition, while there is some overlap with the California Fish & 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.
On March 24, 2009, the SCVWD board of directors passed a resolution calling for a mandatory 15% reduction in water
use for the remainder of the calendar year 2009. On December 8, 2009, this call for conservation was further extended through
June 2010. To effect water restrictions, SCVWD worked with other political subdivisions that possess the authority to enact and
enforce drought ordinances in order to effect such restrictions. San Jose Water Company worked with the CPUC to develop its
water conservation plan to comply with the call for a 15% reduction in water use. The CPUC approved the plan, which became
effective on August 12, 2009 and remained in effect through June 2010.
On July 13, 2010, the SCVWD board of directors passed a resolution calling for a three-month, 10% mandatory water
conservation through September 30, 2010. On August 31, 2010, the SCVWD board of directors held a special work study
session, which included retailers and municipalities, to discuss tiered rates and the effect on water conservation.
On September 28, 2010, the SCVWD board of directors voted to end mandatory conservation, but continued to request
voluntary 10% conservation through June 30, 2011. Upon expiration, the request for voluntary conservation was not renewed
by the SCVWD board of directors.
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
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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 2040, 2044 and 2050. The agreements
provide CLWSC with 6,700 acre-feet of water per year from Canyon Lake and other sources 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 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.
Seasonal Factors
Water sales are seasonal in nature and influenced by weather conditions. The timing of precipitation and climatic
conditions can cause seasonal water consumption by customers to vary significantly. Demand for water is generally lower
during the cooler and rainy winter months. Demand increases in the spring when the temperature rises and rain diminishes.
Competition
San Jose Water Company and CLWSC are public utilities regulated by the 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 California law, 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
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.
Water Utility Services is 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 and the TCEQ for San Jose Water Company and CLWSC, respectively.
Other state and local environmental regulations apply to our Water Utility Services’ operations and facilities. These
regulations relate primarily to the handling, storage and disposal of hazardous materials and discharges to the environment. As
part of routine replacement of infrastructure, San Jose Water Company identified legacy equipment containing mercury which
was released into the surrounding soil. San Jose Water Company has determined there is no risk of contamination to the water
supply, notified the appropriate authorities and remediated the affected area. San Jose Water Company also identified ten other
potentially affected sites and will be assessing the mercury impacts, if any, in conjunction with its infrastructure replacement
7
program. SJW Corp. believes there will be no material financial impact related to this matter. When operating conditions
allowed it, backwash water from Saratoga Water Treatment Plant was discharged to Saratoga Creek as authorized under the
Region Wide General National Pollutant Discharge Elimination System Permit for Discharges from Surface Water Treatment
Facilities for Potable Supply (Order R2-2003-0062 prior to March 1, 2010 and Order R2-2009-0033 effective March 1, 2010).
San Jose Water Company monitored physical and chemical properties of the effluent in accordance with the permit
requirements. The Regional Water Quality Control Board requires these results to be submitted by November 15th of each year
in an annual self-monitoring report. In preparation of the 2010 report, staff determined that San Jose Water Company exceeded
the prescribed limits for total suspended solids and for zinc. San Jose Water Company had suspended discharging under this
permit at that time and there is no on-going violation. As of December 31, 2011, the Regional Water Quality Control Board has
not taken any action related to this matter, and SJW Corp. believes there will be no material financial impact related to this
matter.
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, 2011, SJW Corp. had 385 employees, of whom 347 were San Jose Water Company employees and
38 were CLWSC employees. At San Jose Water Company, 105 were executive, administrative or supervisory personnel, and
242 were members of unions. On November 23, 2010, San Jose Water Company reached a three-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, 2011
through December 31, 2013. The agreements include a 2% wage increase in 2011, 2% in 2012 and 3% in 2013 for union
workers as well as increases in medical co-pays and dental deductibles. As of December 31, 2011, CLWSC had 38 employees,
of whom 9 were exempt and 29 were non-exempt employees. Non-exempt employees are subject to overtime but are not union
represented.
8
Officers of the Registrant
Name
G.J. Belhumeur........
Age
65
D.R. Drysdale ..........
56
C.S. Giordano ..........
55
P. L. Jensen..............
52
J.P. Lynch.................
52
S. Papazian ..............
36
W.R. Roth................
59
W.L. Avila-Walker...
48
R.S. Yoo...................
61
Offices and Experience
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.
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.
San Jose Water Company—Officer, Chief Engineer. Mr. Giordano has served as Chief
Engineer since June 2007. 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.
San Jose Water Company—Senior Vice President, Regulatory Affairs. Mr. Jensen has served as
Senior Vice President of Regulatory Affairs since October 2011. From July 2007 to October
2011, Mr. Jensen was Vice President of Regulatory Affairs. From 1995 to July 2007, Mr.
Jensen was Director of Regulatory Affairs. Mr. Jensen has been with San Jose Water Company
since 1995.
SJW Corp.—Chief Financial Officer and Treasurer. Mr. Lynch has served as Chief Financial
Officer and Treasurer since October 2010. He is also Chief Financial Officer and Treasurer of
San Jose Water Company, SJW Land Company, SJWTX, Inc. and Texas Water Alliance
Limited. Prior to joining the Corporation, Mr. Lynch was an Audit Partner with KPMG LLP.
Mr. Lynch was with KPMG LLP for 26 years. Mr. Lynch is a certified public accountant.
SJW Corp.—Corporate Secretary and Attorney. Ms. Papazian has served as Corporate
Secretary and Attorney for SJW Corp. and San Jose Water Company since February 2005. She
is also Corporate Secretary of SJW Land Company, SJWTX, Inc. and Texas Water Alliance
Limited. 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.
SJW Corp.—President and Chief Executive Officer of SJW Corp., San Jose Water Company,
SJW Land Company, SJWTX, Inc. and Texas Water Alliance Limited. 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.
San Jose Water Company—Controller. Ms. Avila-Walker has served as Controller since
September 2009. From August 2008 to September 2009, Ms. Avila-Walker served as Director
of Compliance. From May 2005 to May 2008, Ms. Avila-Walker served as Director of
Reporting and Finance.
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.
9
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.
Available Information
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.sjwcorp.com, as
soon as reasonably practicable, after SJW Corp. electronically files such material with, or furnishs such material to, the SEC.
The content of SJW Corp.’s website is not incorporated by reference to or part of this report.
You may also obtain a copy of any of these reports directly from the SEC. You may read and copy any material we file
or furnish with the SEC at their Public Reference Room, located at 100 F Street N.E., Washington, D.C. 20549. The phone
number for information about the operation of the Public Reference Room is 1-800-732-0330. Because we electronically file
our reports, you may also obtain this information from the SEC internet website at http://www.sec.gov.
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 consolidated financial statements and the notes thereto.
Our business is regulated and may be adversely affected by changes to the regulatory environment.
San Jose Water Company and CLWSC are regulated public utilities. The operating revenue of San Jose Water Company
and CLWSC result primarily from the sale of water at rates authorized by the CPUC and the TCEQ, respectively. The CPUC
and TCEQ set rates that are intended to provide revenues sufficient to recover normal operating expenses, provide funds for
replacement of water infrastructure and produce a fair and reasonable return on shareholder common equity. Please refer to Part
I, Item 1, “Regulation and Rates” for a discussion of the most recent rate cases for San Jose Water Company, which has
authorized rates for 2010 through 2012, and for CLWSC. In our applications for rate approvals, we rely upon estimates and
forecasts to propose rates for approval by the CPUC or TCEQ. No assurance can be given that our estimates and forecasts will
be correct or that the CPUC or TCEQ will agree with our estimates and forecasts and approve our proposed rates. To the extent
our authorized rates may be too low, revenues may be insufficient to cover Water Utility Services’ operating expenses, capital
requirements and SJW Corp.’s historical dividend rate. In addition, delays in approving rate increases may negatively affect our
operating results.
In addition, policies and regulations promulgated by the regulators govern the recovery of capital expenditures, the
treatment of gains from the sale of real property, the offset of production and operating costs, the recovery of the cost of debt,
the optimal equity structure, and the financial and operational flexibility to engage in non-tariffed 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, Water Utility Services’ future operating results may be adversely affected. Further, from time to time, the
commissioners at the CPUC and the TCEQ change. For example, in California, the Governor appointed three new
commissioners to the CPUC in 2011. Such changes could lead to changes in policies and regulations. There can be no assurance
that the resulting changes in policies and regulation will not adversely affect our operating results or financial condition.
Recovery of regulatory assets is subject to adjustment by the regulatory agency and could impact the operating
results of Water Utility Services.
Generally accepted accounting principles for water utilities include the recognition of regulatory assets and liabilities as
permitted by FASB ASC Topic 980—“Regulated Operations.” In accordance with ASC Topic 980, 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. Please
refer to Note 1 of the Notes to Consolidated Financial Statements for a summary of net regulatory assets. If the assessment of
the probability of recovery in the ratemaking process is incorrect and the applicable ratemaking body determines that a deferred
cost is not recoverable through future rate increases, the regulatory assets or liabilities would need to be adjusted, which could
have an adverse effect on our financial results.
10
Changes in water supply, water supply costs or the mix of water supply could adversely affect the operating
results and business of 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, legal or other 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 overall 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 in California continue to be in flux, and
therefore San Jose Water Company cannot be certain that it will be able 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. 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 6,700 acre-feet of water which is pumped from Canyon Lake at two lake intakes and
other sources, 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.
Water Utility Services’ operations are seasonal, thus quarterly fluctuation in results of operations may be significant.
Rainfall and other weather conditions also affect the operations of Water Utility Services. Most water consumption occurs
during the third quarter of each year when weather tends to be warm and dry. In drought seasons, if customers are encouraged
or 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. (See also Part I, Item 1, “Water Supply”)
A contamination event or other decline in source water quality could affect the water supply of Water Utility
Services and therefore adversely affect our business and operating results.
Water Utility Services is required under environmental regulations to comply with water quality requirements. Through
water quality compliance programs, Water Utility Services continually monitors 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 SJW Corp. will continue to comply with all applicable water quality requirements. In
11
the event a contamination is detected, Water Utility Services must either 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. In addition, we could be held liable for consequences arising from hazardous substances in our water supplies or
other environmental damages. Our insurance policies may not be sufficient to cover the costs of these claims.
Water Utility Services is subject to litigation risks concerning water quality and contamination.
Although Water Utility Services has not been and is not a party to any environmental and product-related lawsuits, such
lawsuits against other water utilities have increased in frequency in recent years. If Water Utility Services is subject to an
environmental or product-related lawsuit, they might incur significant legal costs and it is uncertain whether it would be able to
recover the legal costs from ratepayers or other third parties. Although Water Utility Services has liability insurance coverage
for bodily injury and property damage, product liability is excluded from this coverage. Our pollution liability policy extends
coverage for product liability, but is subject to exclusions and limitations built into the policy. Costs for defense are included
within the limit of insurance on the pollution liability policy.
New or more stringent environmental regulations could increase Water Utility Services’ operating costs and
affect its business.
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 Water Utility Services’ water quality compliance
costs, hamper Water Utility Services’ available water supplies, and increase future capital expenditure.
Under the federal Safe Drinking Water Act, Water Utility Services is subject to regulation by the EPA of the quality of
water it sells and treatment techniques it uses to make the water potable. The EPA promulgates nationally applicable standards,
including maximum contaminant levels for drinking water. Water Utility Services is currently in compliance with all of the
primary maximum contaminant levels promulgated to date. Additional or more stringent requirements may be adopted by each
state. There can be no assurance that Water Utility Services will be able to continue to comply with all water quality
requirements.
Water Utility Services has 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 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
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. 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.
Water Utility Services rely on information technology and systems that are key to business operations. A system
malfunction or security breach could adversely affect business operations.
Information technology is key to the operation of Water Utility Services, including but not limited to payroll, general
ledger activities, bill remittance processing, providing customer service and the use of Supervisory Control and Data
Acquisition systems to operate our distribution system. Among other things, system malfunctions and security breaches could
prevent us from operating or monitoring our facilities, billing accurately and timely analysis of financial results. Our
profitability and cash flow could be affected negatively in the event these systems do not operate effectively or are
circumvented.
The water utility business requires significant capital expenditures that are dependent on our ability to secure
appropriate funding. If SJW Corp. is unable to obtain sufficient capital or if the rates at which we borrow increase,
there would be a negative impact on our results of operations.
The water utility business is capital-intensive. SJW Corp. funds capital expenditures through a variety of sources,
including cash received from operations, funds received from developers as contributions or advances and borrowing. We
cannot provide any assurance that the historical sources of funds for capital expenditures will continue to be adequate or that
the cost of funds will remain at levels permitting us to earn a reasonable rate of return. A significant change in any of the
funding sources could impair the ability of Water Utility Services to fund its capital expenditures, which could impact our
ability to grow our utility asset base and earnings. Any increase in the cost of capital through higher interest rates or otherwise
12
could adversely affect our results of operations.
Our ability to borrow funds may be affected by the ongoing national and international financial crisis. Disruptions in the
capital and credit markets or further deteriorations in the strength of financial institutions could adversely affect SJW Corp.’s
ability to draw on its line of credit or issue long-term debt. In addition, government policies, the state of the credit markets and
other factors could result in increased interest rates, which would increase SJW Corp.’s cost of capital.
We operate in areas subject to natural disasters or that may be the target of terrorist activities.
We operate in areas that are prone to earthquakes, fires and other natural disasters. A significant seismic event in
northern California, where the majority of our operations are concentrated, or other natural disaster in northern California or
Texas could adversely impact our ability to deliver water to our customers and our costs of operations. A major disaster could
damage or destroy substantial capital assets. The CPUC and TCEQ have historically allowed utilities to establish catastrophic
event memorandum accounts as a possible mechanism to recover costs. However, we can give no assurance that the CPUC,
TCEQ, or any other commission would allow any such cost recovery mechanism in the future.
In light of the threats to the nation’s health and security since the September 11, 2001 terrorist attacks, we have taken
steps to increase security measures at our facilities and heighten employee awareness of threats to our water supply. We have
also tightened our security measures regarding the delivery and handling of certain chemicals used in our business. We have
and will continue to bear increased costs for security precautions to protect our facilities, operations and supplies. These costs
may be significant. While some of these costs are likely to be recovered in the form of higher rates, there can be no assurance
that the CPUC will approve a rate increase to recover all or part of such costs and, as a result, the Company’s operating results
and business may be adversely affected. Further, despite these tightened security measures, we may not be in a position to
control the outcome of terrorist events should they occur.
A failure of our reservoirs, storage tanks, mains or distribution networks could result in losses and damages that
may affect our financial condition and reputation.
We distribute water through an extensive network of mains and store water in reservoirs and storage tanks located
across our service areas. A failure of major mains, reservoirs, or tanks could result in injuries and damage to residential and/or
commercial property for which we may be responsible, in whole or in part. The failure of major mains, reservoirs or tanks may
also result in the need to shut down some facilities or parts of our water distribution network in order to conduct repairs. Such
failures and shutdowns may limit our ability to supply water in sufficient quantities to our customers and to meet the water
delivery requirements prescribed by governmental regulators, which could adversely affect our financial condition, results of
operations, cash flow, liquidity and reputation. Any business interruption or other losses might not be covered by insurance
policies or be recoverable in rates, and such losses may make it difficult for us to secure insurance in the future at acceptable
rates.
SJW Land Company has a significant 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 and include the following risks.
•
•
•
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.
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 delayed effect in the performance of real estate in relation to the
overall economy. This delayed 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, increases in rates of returns demanded by investors, and fluctuation of
interest rates, eroding any unrealized capital appreciation and, potentially, invested capital.
13
A drop in the value of a real estate property or increase in vacancy could result in reduced future cash
flows to amounts below the property’s current carrying value and could result in an impairment charge.
•
Concentration/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.
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.
There can be no assurance that we will continue to pay dividends in the future or, if dividends are paid, that they
will be in amounts similar to past dividends.
Dividends on our common stock will only be paid if and when declared by our Board of Directors. Our earnings,
financial condition, capital requirements, applicable regulations and other factors, including the timeliness and adequacy of rate
increases, will determine both our ability to pay dividends on common stock and the amount of the dividends declared by our
Board of Directors. There can be no assurance that we will continue to pay dividends in the future or, if dividends are paid, that
they will be in amounts similar to past dividends.
Our business strategy, which includes acquiring water systems, developing and investing in real estate and
expanding nonregulated contract services, will expose us to new risks which could have a material adverse effect on our
business.
Our business strategy focuses on the following: (1) regional regulated water utility operations, (2) regional nonregulated
water utility related services provided in accordance with the guidelines established by the CPUC in California and the TCEQ
in Texas, and (3) out-of-region water and utility related services, primarily in the Western United States. The execution of our
business strategy will expose us to different risks than those associated with the current utility operations. Costs are incurred in
connection with the execution of our business 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 we decide to undertake may involve risks and have a material adverse effect on our core business, impact our ability
to finance our business and affect our compliance with regulatory requirements. Any businesses we acquire may not achieve
sales, customer growth and projected profitability that would justify the investment. Any difficulties we encounter in the
integration process, including the integration of controls necessary for internal control and financial reporting, could interfere
with our operations, reduce our operating margins and adversely affect our internal controls.
Adverse investment returns and other factors may increase our pension costs and pension plan funding
requirements.
A substantial number of our employees are covered by a defined benefit pension plan. Our pension costs and the funded
status of the plan are affected by a number of factors including the discount rate, mortality rates of plan participants, investment
returns on plan assets, and pension reform legislation. Any change in such factors could result in an increase in future pension
costs and an increase in our pension liability, requiring an increase in plan contributions. In 2012, we expect that our net
pension costs will increase to approximately $10.3 million, which is approximately $2.2 million more than 2011. We also
expect to make approximately $10.3 million in contributions to our pension plan in 2012, which is approximately $2.6 million
more than we made in 2011.
Other factors that could affect operating results.
Other factors that could adversely affect our operating results include the following:
•
•
The level of labor and non-labor operating and maintenance expenses as affected by inflationary forces
and collective bargaining power could adversely affect our operating and maintenance expenses.
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.
14
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 265 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 270 million gallons per day and the present capacity for taking purchased water is approximately 179 million
gallons per day. The surface water collection system has a physical delivery capacity of approximately 35 million gallons per
day. During 2011, a maximum and average of 168 million gallons and 118 million gallons of water per day, respectively, were
delivered to the system.
CLWSC maintains a service area that covers approximately 243 square miles located in the southern region of the Texas
hill country in Comal and Blanco counties. Our service area surrounds an 8,200 surface acre reservoir (Canyon Lake).
Production wells are located in an unregulated portion of the Trinity aquifer and have the ability to pump a combined 2.8 billion
gallons annually. CLWSC has contracts for 1.9 billion gallons of untreated surface water and 235 million gallons of treated
surface water from the GBRA annually. CLWSC owns and operates two surface water treatment plants with a combined
production capacity of 6.5 million gallons per day. CLWSC has 495 miles of transmission and distribution mains and maintains
65 storage tanks with a total storage capacity of 6.2 million gallons.
Water Utility Services hold all of 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 93 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. SJW Land Company owns a 70% limited partnership interest in 444 West Santa Clara Street, L.P.
One of our California properties is owned by such partnership. SJW Land Company consolidates its limited partnership interest
in 444 West Santa Clara Street, L.P. as a variable interest entity within the scope of ASC Topic 810. The following table is a
summary of SJW Land Company properties described above:
Description
2 Commercial buildings ...........
Location
Acreage
San Jose, California
Warehouse building..................
Windsor, Connecticut
Warehouse building..................
Orlando, Florida
Retail building ..........................
El Paso, Texas
Warehouse building..................
Phoenix, Arizona
Warehouse building..................
Knoxville, Tennessee
Commercial building................
Knoxville, Tennessee
Undeveloped land.....................
Knoxville, Tennessee
Undeveloped land.....................
San Jose, California
Item 3.
Legal Proceedings
Square Footage
28,000
170,000
147,000
14,000
176,000
361,500
135,000
N/A
N/A
2
17
8
2
11
30
15
10
5
Percentage as of December 31,
2011 of SJW Land Company
Revenue
Expense
14%
17%
10%
7%
18%
N/A
34%
N/A
N/A
12%
12%
7%
2%
11%
13%
43%
N/A
N/A
SJW Corp. is subject to ordinary routine 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 SJW Corp.’s business, financial position, results of operations or cash flows.
Item 4.
Removed and Reserved
15
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 2011 and 2010 fiscal years is contained in the
section captioned “Market price range of stock” in the tables set forth in Note 15 of “Notes to Consolidated Financial
Statements” in Part II, Item 8.
As of December 31, 2011, there were 468 record holders of SJW Corp.’s common stock.
Dividends
Dividends have been paid on SJW Corp.’s and its predecessor’s common stock for 273 consecutive quarters and the
annual dividend amount has increased in each of the last 44 years. Additional information as to the cash dividends paid on
common stock in 2011 and 2010 is contained in the section captioned “Dividend per share” in the tables set forth in Note 15 of
“Notes to Consolidated Financial Statements” in Part II, Item 8. Future dividends will be determined by the Board of Directors
after consideration of various financial, economic and business factors.
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 a Water Utility Index and the Standard & Poor’s 500 Index during the last five years
ended December 31, 2011. The comparison assumes $100 was invested on December 31, 2006 in SJW Corp.’s common stock
and in each of the foregoing indices and assumes reinvestment of dividends.
The following descriptive data is supplied in accordance with Rule 304(d) of Regulation S-T:
SJW Corp. ........................................................
Water Utility Index...........................................
S&P 500 ...........................................................
100
100
100
91
94
106
81
90
66
62
86
84
75
99
97
69
109
99
2006
2007
2008
2009
2010
2011
The Water Utility Index is the 10 water company Water Utility Index prepared by Wells Fargo Securities, LLC.
16
Item 6.
Selected Financial Data
FIVE YEAR STATISTICAL REVIEW
SJW Corp. and Subsidiaries
2011
2010
2009
2008*
2007*
CONSOLIDATED RESULTS OF OPERATIONS
(in thousands)
Operating revenue................................................................
Operating expense:
Purchased water.................................................................
Power.................................................................................
Groundwater extraction charges........................................
Other production costs.......................................................
Administrative and general................................................
Maintenance ......................................................................
Property taxes and other non-income taxes.......................
Depreciation and amortization ..........................................
Impairment on real estate investment................................
$
238,955
215,638
216,097
220,347
206,601
54,317
5,394
20,997
11,345
39,136
13,261
8,921
31,193
—
43,557
6,429
26,614
10,702
38,184
12,242
7,907
28,331
3,597
45,317
6,582
31,635
10,074
35,445
13,172
8,549
25,643
—
48,291
7,559
34,368
9,871
30,207
13,123
6,793
24,043
—
48,596
7,532
30,141
9,256
27,985
11,628
6,307
22,854
—
Total operating expense................................................
184,564
177,563
176,417
174,255
164,299
Operating income.................................................................
Interest expense, other income and deductions....................
Income before income taxes ................................................
Provision for income taxes...................................................
Net income ...........................................................................
Dividends paid .....................................................................
CONSOLIDATED PER SHARE DATA (BASIC)
Net income ...........................................................................
Dividends paid .....................................................................
Shareholders’ equity at year-end..........................................
CONSOLIDATED BALANCE SHEET (in thousands)
Utility plant and intangible assets ........................................
Less accumulated depreciation and amortization ................
Net utility plant .............................................................
Net real estate investment ....................................................
Total assets...........................................................................
Capitalization:
54,391
(18,947)
35,444
14,566
20,878
12,823
1.12
0.69
14.21
38,075
3,071
41,146
16,740
24,406
12,603
1.32
0.68
13.76
$ 1,112,127
355,914
756,213
78,542
1,038,810
1,036,909
322,102
714,807
80,089
935,362
Shareholders’ equity..........................................................
Long-term debt, less current portion .................................
Total capitalization........................................................
$
264,004
343,848
607,852
255,032
295,704
550,736
39,680
(14,229)
25,451
10,280
15,171
12,202
0.82
0.66
13.67
944,026
298,921
645,105
80,812
878,474
252,756
246,879
499,635
46,092
(10,597)
35,495
14,034
21,461
11,875
1.17
0.65
13.81
878,743
272,562
606,181
82,489
850,877
254,326
216,613
470,939
42,302
(10,430)
31,872
12,549
19,323
11,089
1.05
0.60
12.92
816,310
255,025
561,285
84,195
767,326
236,934
216,312
453,246
OTHER STATISTICS—WATER UTILITY
SERVICES
Average revenue per connection..........................................
Investment in utility plant per connection ...........................
Connections at year-end.......................................................
Miles of main at year-end ....................................................
Water production (million gallons)......................................
Maximum daily production (million gallons)......................
Population served (estimate)................................................
____________________
*
to current year presentation. See Note 1 of Notes to Consolidated Financial Statements for further information.
916
4,407
235,300
2,883
45,493
196
1,060,600
1,010
4,702
236,500
2,915
46,033
181
1,066,000
920
4,019
234,900
2,881
47,900
192
1,058,800
$
$
914
3,751
234,300
2,814
51,961
204
1,056,100
860
3,499
233,300
2,743
51,922
205
1,051,600
The Company has made reclassifications to certain previously reported balances in the consolidated results of operations to conform
17
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollar amounts in thousands, except where otherwise noted)
Description of Business
SJW Corp. is a publicly traded company and is a holding company with four 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.
SJWTX, Inc., a wholly owned subsidiary of SJW Corp., doing business as Canyon Lake Water Service Company, is a
public utility in the business of providing water service to approximately 10,000 connections that serve approximately 36,000
people. CLWSC’s service area comprises more than 243 square miles in western Comal County and southern Blanco County in
the growing region between San Antonio and Austin, Texas. SJWTX, Inc. has a 25% interest in Acequia Water Supply
Corporation. The water supply corporation has been determined to be a variable interest entity within the scope of ASC Topic
810 with SJWTX, Inc. as the primary beneficiary, and as a result, it has been consolidated with SJWTX, Inc.
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.
Texas Water Alliance Limited, a wholly owned subsidiary of SJW Corp., is undertaking activities that are necessary to
develop a water supply project in Texas.
Business Strategy
SJW Corp. focuses its business initiatives in three strategic areas:
(1)
(2)
Regional regulated water utility operations.
Regional nonregulated water utility related services provided in accordance with the guidelines established by
the CPUC in California and the TCEQ in Texas.
(3)
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 and CLWSC. 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
services, such as water system operations, maintenance agreements and antenna leases, under agreements with municipalities
and other utilities. CLWSC provides nonregulated wholesale water service to adjacent utilities.
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, which
also will benefit its existing regional customers.
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:
•
•
•
•
potential profitability;
regulatory environment;
additional growth opportunities within the region;
water supply, water quality and environmental issues;
18
•
•
•
capital requirements;
general economic conditions; and
synergy potential.
As part of its pursuit of the above three strategic areas, the Company considers from time to time opportunities to
acquire businesses and assets. However, SJW Corp. cannot be certain it will be successful in identifying and consummating any
strategic business acquisitions relating to such opportunities. In addition, any transaction will involve numerous risks, including
the possibility of incurring more costs than benefits derived from the acquisition, the assumption of certain known and
unknown liabilities related to the acquired assets, the diversion of management’s attention from day-to-day operations of the
business, the potential for a negative impact on SJW Corp.’s financial position and operating results, 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.
SJW Corp.’s real estate investment activity is conducted through SJW Land Company. SJW Land Company owns
undeveloped land and owns and operates a portfolio of commercial buildings in the states of California, Florida, Connecticut,
Texas, Arizona and Tennessee. SJW Land Company also owns a limited partnership interest in 444 West Santa Clara Street, L.P.
The partnership owns a commercial building in San Jose, California. SJW Land Company implements its investment strategy
by acquiring properties or exchanging properties for similar investments in tax-free exchanges. SJW Land Company’s real
estate investments diversify SJW Corp.’s asset base.
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 consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated 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. 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:
Revenue Recognition
SJW Corp. recognizes its regulated and nonregulated revenue when services have been rendered, in accordance with
FASB ASC Topic 605—“Revenue Recognition.”
Metered revenue of 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. 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 may result in
an adjustment to the operating revenue in the period which the revision to Water Utility Services’ estimates is determined.
Revenues also include a surcharge collected from regulated customers that is paid to the CPUC. This surcharge is
recorded both in operating revenues and administrative and general expenses.
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, maintenance agreements or antenna leases 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 ASC Topic 980. In accordance with ASC Topic 980, 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. 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 Water Utility
Services through the ratemaking process. The regulatory assets and liabilities recorded by 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 obligations
19
that have not been passed through in 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 disallowances were recognized for the years ending December 31, 2011, 2010 and 2009.
Pension Plan Accounting
San Jose Water Company offers a Pension 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 expected to be received by the employees, mortality,
turnover and medical costs. Plan assets are marked to market at each measurement date. See assumptions and disclosures
detailed in Note 10 of “Notes to Consolidated Financial Statements.”
Income Taxes
SJW Corp. estimates its federal and state income taxes as part of the process of preparing consolidated 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 and Memorandum Accounts
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. Pursuant to Section 792.5 of the California Public
Utilities Code, a balancing account must be maintained for expense items for which revenue offsets have been authorized.
Balancing accounts are currently being maintained for the following items: purchased water, purchased power and
groundwater extraction charges. The amount in the balancing account 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. In
addition, San Jose Water Company maintains balancing accounts for pensions and other approved activities.
Since the amounts in the balancing accounts must be approved by the CPUC before they can be incorporated into rates,
San Jose Water Company does not recognize balancing accounts in its revenue until the CPUC approval occurs. It is typical for
the CPUC to incorporate any over-collected and/or under-collected balances in balancing accounts into customer rates at the
time rate decisions are made as part of the Company’s general rate case proceedings by assessing temporary surcredits and/or
surcharges.
The Company also maintains memorandum accounts to track revenue impacts due to catastrophic events, certain
unforeseen water quality expenses related to new federal and state water quality standards, energy efficiency and any revenue
requirement impact of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Rate recovery
for these memorandum accounts are generally allowed in the next general rate cases.
In the case where the Company’s balancing or memorandum-type accounts that have been authorized by the CPUC
reach certain thresholds or have termination dates, the Company can request the CPUC to recognize the amounts in such
accounts in customer rates prior to the next regular general rate case proceeding by filing an advice letter. If such amounts are
authorized for inclusion into customer rates, revenue would be recognized at the time authorization is received pursuant to ASC
Topic 605 and Sub-topic 980-605.
If the balancing or memorandum-type accounts had been recognized in San Jose Water Company’s financial statements,
San Jose Water Company’s earnings and retained earnings would be decreased by the amount of surcredits in the case of over-
collection or increased by the surcharges in the case of under-collection, less applicable taxes.
Factors Affecting Our Results of Operations
SJW Corp.’s financial condition and results of operations are influenced by a variety of factors including the following:
•
•
•
•
economic utility regulation;
weather;
water usage per customer;
production costs;
20
•
•
•
infrastructure investment;
compliance with environmental, health and safety standards; and
customer growth.
Economic Utility Regulation
Water Utility Services is generally subject to economic regulation by their respective state commissions overseeing
public utilities. Regulatory policies vary from state to state and may change over time. In addition, there may be regulatory lag
between the time a capital investment is made, a consumption decrease occurs, or an operating expense increases and when
those items are adjusted in utility rates.
San Jose Water Company employs a forward-looking test year and has been authorized to use several mechanisms to
mitigate risks faced due to regulatory lag and new and changing legislation, policies and regulation. These include
memorandum accounts to track revenue impacts due to catastrophic events, certain unforeseen water quality expenses related to
new federal and state water quality standards, energy efficiency and any revenue requirement impact of the Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Rate recovery for the balances in these memorandum
accounts are generally allowed in the next general rate cases. San Jose Water Company also maintains balancing accounts to
track changes in purchased water, purchased power, groundwater extraction charges and pension costs for later recovery.
Regulatory risk is mitigated by use of a forward-looking test year which allows the return on and return of utility plant
on a forecasted basis as it is placed in service and interim rate relief is allowed in the event of regulatory lag.
Pursuant to Texas regulation, CLWSC employs a historical test year but requested rates can be placed into effect after
sixty days, which may alleviate regulatory lag. Additionally, rate cases may be filed as necessary but not more often than once
every 12 months.
Infrastructure Investment
The water utility business is capital-intensive. In 2011 and 2010, Company-funded capital improvements were $62,439
and $95,536, respectively, for additions to, or replacements of, property, plant and equipment for our Water Utility Services. We
plan to spend approximately $105,344 in 2012 and $652,500 over the next five years, subject to CPUC and TCEQ approval.
Included in these amounts is approximately $73,500 related to upgrades to San Jose Water Company's 40-year old Montevina
Water Treatment Plant. SJW Corp. funds these expenditures through a variety of sources, including cash received from
operations, funds received from developers as contributions or advances, equity issuances and borrowings. SJW Corp. relies
upon a line of credit, which will expire on June 1, 2012, to fund capital expenditures in the short term and has historically
issued long-term debt to refinance our short-term debt. In the second quarter of 2011, SJW Corp. sold $50,000 in senior notes to
the Prudential Insurance Company of America. While our ability to obtain financing will continue to be a key risk, we believe
that based on our 2011 activities, which were at a time of difficult credit markets, we will have access to the external funding
sources necessary to implement our on-going capital investment programs in the future.
Compliance with Environmental, Health and Safety Standards
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. Under the federal Safe
Drinking Water Act, Water Utility Services is subject to regulation by the EPA of the quality of water it sells and treatment
techniques it uses to make the water potable. The EPA promulgates nationally applicable standards, including maximum
contaminant levels for drinking water. Water Utility Services has 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 to issue additional
regulations under the Safe Drinking Water Act. We incur substantial costs associated with compliance with environmental,
health and safety and water quality regulation to which our Water Utility Services is subject.
Environmental, health and safety and water quality regulations are complex and change frequently, and the overall trend
has been that they have become more stringent over time. It is possible that new or more stringent environmental standards and
water quality regulations could be imposed that will increase Water Utility Services’ water quality compliance costs, hamper
Water Utility Services’ available water supplies, and increase future capital expenditures. 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. In the past,
Water Utility Services has generally been able to recover expenses associated with compliance related to environmental, health
and safety standards, but future recoveries could be affected by regulatory lag and the corresponding uncertainties surrounding
rate recovery.
21
Production Costs
Water Utility Services’ operations require significant production inputs which result in significant production costs.
These costs include power, which is used to operate pumps and other equipment, purchased water and groundwater extraction
charges. For 2011, production costs accounted for approximately 49.9% of our total operating expenses. Price increases
associated with these production inputs would adversely impact our results of operations until rate relief is granted.
Customer Growth
Customer growth in our Water Utility Services is driven by (i) organic population growth within our authorized service
areas and (ii) the addition of new customers to our regulated customer base by acquiring regulated water systems adjacent to or
near our existing service territory. During 2011, 2010 and 2009, we had cash outflows of $4,040, $3,504 and $6,436,
respectively, for acquisitions and water rights which will allow us to expand our regulated customer base. Before entering new
regulated markets, we evaluate the regulatory environment to ensure that we will have the opportunity to achieve an appropriate
rate of return on our investment while maintaining our high standards for quality, reliability and compliance with
environmental, health and safety and water quality standards.
Change in Water Usage Per Customer
Fluctuations in customer demand for water could be due to seasonality, restrictions of use, weather or lifestyle choices,
all of which could affect Water Utility Services’ results of operations. San Jose Water Company residential usage increased
2.3% and decreased 4.9% from 2010 to 2011 and 2009 to 2010, respectively. San Jose Water Company business usage
decreased 1.2% and 3.2% from 2010 to 2011 and 2009 to 2010, respectively. In addition, 2011 residential and business usage
was 11.6% and 6.8%, respectively, lower than the amount authorized in our 2010-2012 general rate case. Residential and
business usage in 2010 was 13.5% and 5.6%, respectively, lower than the amount authorized in our 2010-2012 general rate
case. CLWSC residential and business usage increased 23.2% and decreased 6.8% from 2010 to 2011 and 2009 to 2010,
respectively.
Water Supply
Our ability to meet the existing and future water demands of our customers depends on an adequate supply of water.
Drought, governmental restrictions, overuse of sources of water, the protection of threatened species or habitats or other factors
may limit the availability of ground and surface water. Also, customer usage of water is affected by weather conditions, in
particular during the warmer months. Our water systems experience higher demand in the summer due to the warmer
temperatures and increased usage by customers for outside irrigation of lawns and landscaping. 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. These restrictions may be imposed at a regional or state level and may affect our service areas regardless of our
readiness to meet unrestricted customer demands. San Jose Water Company believes that its various sources of water supply,
which consists of groundwater from wells, surface water from watershed run-off and diversion, and imported water purchased
from the SCVWD, will be sufficient to meet customer demand for 2012. In addition, San Jose Water Company actively works
with the SCVWD to address California’s long-term water supply challenges by continuing to educate customers on responsible
water use practices and to conduct long-range water supply planning. CLWSC believes that they will be able to meet current
and future customer water demands with their water supply which consists of groundwater from wells and purchased raw water
from the GBRA.
Results of Operations
Water sales are seasonal in nature and influenced by weather conditions. The timing of precipitation and climatic
conditions can cause seasonal water consumption by customers to vary significantly. Revenue is generally higher in the warm,
dry summer months when water usage and sales are greater and lower in the winter months when cooler temperatures and
increased rainfall curtail water usage and sales.
The Company reclassified $10,702 and $10,074 of costs incurred to support the delivery of water from other operating
expense to production costs and $8,050 and $7,787 from other operating expense to administrative and general related to
customer service costs for the years ended December 31, 2010 and 2009, respectively. In addition, the Company reclassified
income taxes out of operating expense and changed the presentation of other (expense) income items from a net to gross basis.
These reclassifications were made to conform to the current year presentation and impacted total production costs, total
operating expense and operating income. The Company believes these reclassifications provide investors with better operating
information and are in line with current practices of other water companies and CPUC guidance.
22
Overview
SJW Corp.’s consolidated net income for the year ended December 31, 2011 was $20,878, compared to $24,406 for the
same period in 2010. This represents a decrease of $3,528, or 14%, from 2010. The decrease is primarily attributable to the gain
on sale of California Water Service Group stock that occurred in 2010 that did not reoccur in 2011, offset by our 2010 real
estate impairment loss. This decrease was further offset by higher revenues in 2011 due to cumulative rate increases and the
recognition of our MCRAM account recovery for $5,740. In addition, the Company experienced an increase in depreciation
expense due to increased depreciable assets and an increase in interest expense due to the issuance of a $50,000 SJW Corp.
senior note in June 2011 and a full year of interest expense on our California Pollution Control Financing Authority revenue
bonds which were issued in June 2010.
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
Water Utility Services ...................................................................
Real Estate Services ......................................................................
2011
2010
2009
$
$
234,346
4,609
238,955
212,078
3,560
215,638
212,270
3,827
216,097
The change in consolidated operating revenues was due to the following factors:
2011 vs. 2010
Increase/(decrease)
2010 vs. 2009
Increase/(decrease)
Water Utility Services:
Consumption changes ...................................
$
New customers increase................................
Rate increases................................................
MCRAM .......................................................
Real Estate Services ........................................
$
3,429
706
12,393
5,740
1,049
23,317
2011 vs. 2010
2%
$
—
6%
3%
—
11%
$
(5,504)
354
4,958
—
(267)
(459)
(3)%
—
3 %
— %
— %
— %
The revenue increase consists of $22,268 from Water Utility Services and $1,049 from Real Estate Services.
The revenue increase for Water Utility Services primarily consists of increases in rates approved by the CPUC for an
escalation increase in our 2010-2012 general rate case and an increase intended to offset the SCVWD's increases to purchased
water and groundwater extraction charges as well as a rate increase for CLWSC. The Company also recognized $5,740 in
revenue related to a Mandatory Conservation Revenue Adjustment Memorandum account upon CPUC approval in December
2011. In addition, customer consumption increased primarily due to a drier 2011 compared to 2010.
The revenue increase for Real Estate Services was primarily the result of increased rental income from our Tennessee
property. The tenant has leased the office building for the full year in 2011, compared to only three months in 2010.
2010 vs. 2009
The revenue decrease consists of $192 from Water Utility Services and $267 from Real Estate Services.
The revenue decrease for Water Utility Services is primarily the result of a decrease in consumption due to a wetter
2010 compared to 2009, offset by increases in rates approved by the CPUC in the 2010-2012 general rate case.
The revenue decrease for Real Estate Services was primarily the result of lower rental income from our Tennessee
properties and SJW Land Company’s 70% limited partnership interest in 444 West Santa Clara Street. The former tenant which
23
leased SJW Land Company’s office and distribution buildings in Knoxville, Tennessee under triple net leases had paid through
May 2009. The new tenant had leased only a portion of the office building beginning in the fourth quarter of 2010. The
international real estate firm that occupies the building in which SJW Land Company has a 70% limited partnership interest
renegotiated the lease terms during 2010 which lowered the monthly rental payments but extended the term an additional seven
years.
Water Utility Services’ Operating Revenue and Customer Counts
The following tables present operating revenues and number of customers by customer group of Water Utility Services:
Operating Revenue by Customer Group
Residential and business ...............................................................
Industrial .......................................................................................
Public authorities...........................................................................
Others ............................................................................................
2011
2010
2009
$
$
216,747
1,086
10,008
6,505
234,346
195,431
195,762
1,031
9,306
6,310
924
9,968
5,616
212,078
212,270
During the fourth quarter of 2011 the CPUC approved the revenue related to the MCRAM. Included in the amounts
above is $5,344 in residential and business, $23 in industrial, $333 in public authorities and $40 in others related to the
MCRAM.
Number of Customers
Residential and business ...............................................................
230,622
229,933
229,496
2011
2010
2009
Industrial .......................................................................................
Public authorities...........................................................................
Others ............................................................................................
79
1,419
3,880
75
1,447
3,845
77
1,496
3,831
236,000
235,300
234,900
Operating Expense
Operating expense by segment was as follows:
Operating Expense
Water Utility Services ...................................................................
Real Estate Services ......................................................................
All Other .......................................................................................
2011
2010
2009
$
$
179,293
3,240
2,031
184,564
168,115
6,858
2,590
177,563
170,093
4,372
1,952
176,417
24
The change in consolidated operating expenses was due to the following factors:
2011 vs. 2010
Increase/(decrease)
2010 vs. 2009
Increase/(decrease)
Water production costs:
Change in surface water supply ....................
$
Change in usage and new customers.............
Purchased water and groundwater
extraction charge and energy price increase .
Total water production costs............................
Administrative and general..............................
Maintenance ....................................................
Property taxes and other non-income taxes.....
Depreciation and amortization ........................
Impairment on real estate investment..............
$
Sources of Water Supply
265
743
3,743
4,751
952
1,019
1,014
2,862
(3,597)
7,001
— %
$
1 %
2 %
3 %
— %
1 %
1 %
1 %
(2)%
4 %
$
(2,964)
(4,624)
1,282
(6,306)
2,739
(930)
(642)
2,688
3,597
1,146
(2)%
(2)%
— %
(4)%
2 %
(1)%
— %
2 %
2 %
1 %
San Jose Water Company's water supply consists of groundwater from wells, surface water from watershed run-off and
diversion, reclaimed water and imported water purchased from the SCVWD under the terms of a master contract with SCVWD
expiring in 2051.
CLWSC's water supply consists of groundwater from wells and purchased raw water from the GBRA. CLWSC has
long-term agreements with GBRA, which expire in 2040, 2044 and 2050. The agreements, which are take-or-pay contracts,
provide CLWSC with 6,700 acre-feet of water per year from Canyon Lake and other sources at prices to be adjusted
periodically by GBRA.
Surface water is the least expensive source of water. The following table presents the change in sources of water supply
for Water Utility Services:
Purchased water ............................................................................
Groundwater..................................................................................
Surface water.................................................................................
Reclaimed water............................................................................
Average water production cost per MG ........................................
$
Source of Water Supply
2011
2010
2009
(million gallons) (MG)
27,549
13,029
5,059
396
46,033
2,000
22,767
17,125
5,203
398
45,493
1,919
23,588
20,277
3,613
422
47,900
1,954
Water production in 2011 for Water Utility Services increased 540 million gallons from 2010. Water production in 2010
decreased 2,407 million gallons from 2009. The changes are primarily attributable to changes in consumption by customers and
are consistent with the related water production changes.
The contract water rates for San Jose Water Company 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 rate for SCVWD’s fiscal years
2012, 2011 and 2010 was $2,053, $1,903 and $1,903 per million gallons, respectively. The contractual cost of the groundwater
extraction charge for water pumped from the ground basin was $1,746, $1,596 and $1,596 per million gallons for SCVWD's
fiscal years 2012, 2011 and 2010.
Unaccounted-for water for 2011 and 2010 approximated 6.8% 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 Water Utility Services’ unaccounted-for
water through main replacements and lost water reduction programs.
25
The various components of operating expenses are discussed below.
Water production costs
2011 vs. 2010
Water production costs increased due to $3,743 in net higher per unit costs paid for purchased water, groundwater
extraction and energy charges, an increase in customer usage of $743 and $265 in increased surface water supply costs due to
decreased availability of surface water supply in 2011 compared to 2010.
2010 vs. 2009
Water production costs decreased due to a decrease in customer usage of $4,624 and $2,964 in decreased surface water
supply costs due to increased availability of surface water supply in 2010 compared to 2009, offset by $1,282 in net higher per
unit costs paid for purchased water, groundwater extraction charge and energy.
Administrative and General Expense
Administrative and general expenses include payroll related to administrative and general functions, all employee
benefits charged to expense accounts, insurance expenses, legal fees, regulatory utility commissions’ expenses, expenses
associated with being a public company, and general corporate expenses.
2011 vs. 2010
Administrative and general expense increased $952 in 2011, or 2%, in comparison to 2010. The increase consisted
primarily of: (1) $806 in contracted work primarily due to water conservation efforts related to the recycled water retrofit
program, (2) $551 in regulatory fees primarily due to an increase in rate case filings, (3) $511 due to the increased cost of health
insurance, (4) $315 due to new hires and salary increases as a result of the three-year collective bargaining agreements reached
with our unions in 2010, offset by (5) $806 decrease in pension and retirement expenses, (6) $256 decrease in legal expenses
and (7) $169 decrease in miscellaneous expenses. SJW Corp. anticipates an increase in pension and retirement expenses in 2012
primarily due to a decreasing discount rate coupled with the decline in return on pension plan assets. In addition, as a result of
the three-year collective bargaining agreements signed in 2010 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, salaries are expected to increase 2% in 2012 and 3% in 2013 for union workers as well as increases in medical co-
pays and dental deductibles.
2010 vs. 2009
Administrative and general expense increased $2,739 in 2010, or 8%, in comparison to 2009. The increase consisted
primarily of: (1) $1,797 in pension and retirement expenses, of which approximately $970 was due to San Jose Water Company
updating its expected return on plan assets assumption, (2) $465 due to salary increases and new hires, (3) $360 due to the
increased cost of health insurance and (4) $117 in miscellaneous expenses. San Jose Water Company updated its discount rate
and expected return on pension plan investment assets assumptions in November 2010 to reflect the approved redistribution of
investments held between equity and fixed income securities in its pension plan investment portfolio.
Maintenance Expense
Maintenance expense increased $1,019 in 2011, or 8%, in comparison to 2010, and decreased $930 in 2010, or 7%, in
comparison to 2009. The increase in 2011 consisted primarily of: (1) $673 increase in contracted work, paving, and materials
and supplies as a result of an increase in main leak repairs, (2) $596 due to salary increases and a decrease in time charged to
capital projects and (3) $250 decrease in miscellaneous expenses. The decrease in 2010 consisted primarily of: (1) $498 in
salaries due to a decrease in overtime and an increase in time charged to capital projects, (2) $415 decrease in contracted work,
paving, and materials and supplies as a result of a decrease in main leak repairs and (3) $17 decrease in miscellaneous expenses.
In addition, the level of maintenance expense varies with the level of public work projects instituted by local government
agencies, weather conditions and the timing and nature of general maintenance as needed for SJW Corp.’s facilities.
Property Taxes and Other Non-income Taxes
Property taxes and other non-income taxes for 2011 and 2010 increased $1,014 and decreased $642, respectively. The
increase in 2011 was primarily a result of increased utility plant. The decrease in 2010 was primarily due to a reduction in
property taxes for the Tennessee properties.
Depreciation and Amortization
Depreciation and amortization expense increased $2,862 in 2011, or 10%, in comparison to 2010, and increased $2,688
in 2010, or 10%, in comparison to 2009. The increase in both years was due to increases in utility plant.
26
Impairment on Real Estate Investment
In connection with the execution of an option agreement in 2010, SJW Land Company determined that a change in
circumstances had occurred requiring a recoverability test on one of its real estate investments in Tennessee. As a result of the
recoverability test and subsequent assessment of fair value, we determined that the property was impaired. SJW Land Company
recorded a pre-tax impairment of $3,597 on the real estate investment during the year ended December 31, 2010. No
impairments occurred during the same period in 2011 and 2009. Please refer to Note 14, “Impairment of Tennessee Distribution
Facility,” of Notes to Consolidated Financial Statements for further information.
Other Income and Expense
Interest expense, including interest on long-term debt and mortgages, increased $1,992, or 11%, in 2011 compared to
2010. In June 2011, SJW Corp. entered into a note agreement with the Prudential Insurance Company of America, pursuant to
which the Company sold an aggregate principal amount of $50,000 of its 4.35% senior notes. In addition, San Jose Water
Company incurred a full year of interest on its California Pollution Control Financing Authority revenue bonds which were
issued in June 2010.
Interest expense, including interest on long-term debt and mortgages, increased $1,713, or 11%, in 2010 compared to
2009. In June 2010, San Jose Water Company entered into a loan agreement with the California Pollution Control Financing
Authority, under which the proceeds from the issuance by the California Pollution Control Financing Authority of its 5.10%
fixed rate revenue bonds in an aggregate principal amount of $50,000 have been loaned to San Jose Water Company. In
addition, San Jose Water Company incurred a full year of interest on Series J and Series K senior notes which were issued in
February 2009 and May 2009, respectively.
SJW Corp.’s consolidated weighted-average cost of long-term debt, including the mortgages and the amortization of
debt issuance costs was 6.3%, 6.6% and 6.9% for the years ended December 31, 2011, 2010 and 2009, respectively.
Provision for Income Taxes
Income tax expense for 2011 was $14,566, compared to $16,740 in 2010. The effective consolidated income tax rates
for 2011, 2010 and 2009 were 41%, 41% and 40%, respectively. Please refer to Note 5, “Income Taxes,” of Notes to
Consolidated Financial Statements for the reconciliation of actual to expected income tax expense.
Other Comprehensive Loss
Other comprehensive loss in 2011 was $85, net of tax, due to a decrease in the market value of the investment in
California Water Service Group. Other comprehensive loss in 2010 was $10,828, net of tax, due to a change in the market value
of the investment in California Water Service Group of $44,000 and the recognition of unrealized holding gains of $10,784 that
was reclassified out of accumulated other comprehensive income due to the sale of California Water Service Group stock
during 2010.
Liquidity and Capital Resources
Water Utility Services’ business derives the majority of its revenue directly from residential and business customers.
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 Californians may migrate to other states with a lower cost of living during this recessionary environment. As of
December 31, 2011, the change in the number of customers has been minimal and write-offs for uncollectible accounts have
been less than 1% of total revenue, unchanged from the prior year. Management believes it can continue to collect its accounts
receivable balances at its historical collection rate.
Funds collected from Water Utility Services’ 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 $12,823 and funded its working capital in 2011. The remaining amount is available to
fund SJW Corp.’s capital expenditure program.
The condition of the capital and credit markets or the strength of financial institutions could impact SJW Corp.’s ability
to draw on its line of credit or issue long-term debt. In addition, government policies, the state of the credit markets and other
factors could result in increased interest rates, which would increase SJW Corp.’s cost of capital. While our ability to obtain
financing will continue to be a key risk, we believe that based on our 2011 activities, which were at a time of difficult credit
markets, we will have access to the external funding sources necessary to implement our on-going capital investment programs
in the future.
27
In 2011, the common dividends declared and paid on SJW Corp.’s common stock represented 61% of net income for
2011. Dividends have been paid on SJW Corp.’s and its predecessor’s common stock for 273 consecutive quarters and the
annual dividend amount has increased in each of the last 44 years. While historically SJW Corp. has paid dividends equal to
approximately 50% to 60% of its net income, SJW Corp. cannot guarantee that trend will continue in the future.
Cash Flow from Operations
In 2011, SJW Corp. generated cash flow from operations of approximately $64,200, compared to $37,200 in 2010 and
$54,500 in 2009. Cash flow from operations is primarily generated by net income from its revenue producing activities,
adjusted for non-cash expenses for depreciation and amortization, deferred income taxes, gains on the sale of assets,
impairment on real estate investments and changes in working capital. Cash flow from operations increased in 2011 by
approximately $27,000. This increase was caused by a combination of the following factors: (1) net income adjusted for non-
cash items and gains and losses from asset activity increased $23,000, (2) net collection of taxes receivable was $7,400 more
than the prior year, (3) net payments for postretirement benefits drove an increase of $2,500, (4) other current asset representing
the MCRAM unbilled revenue drove a decrease of 5,700 and (5) general working capital changes caused a $200 decrease. The
decrease in 2010 of cash flow from operations of approximately $17,300 was affected by a combination of the following
factors: (1) net income adjusted for non-cash items and gains and losses from asset activity decreased $1,700, (2) general
working capital changes caused a $4,400 increase, (3) an increase in rates which resulted in a higher accounts receivable
balance drove a decrease in working capital of $3,900, (4) taxes paid were $10,500 greater than the prior year and (5) net
payments for postretirement benefits drove a decrease of $5,600.
Cash Flow from Investing Activities
In 2011, SJW Corp. used approximately $62,400 of cash for Company funded capital expenditures, $7,300 for
developer funded capital expenditures, and $4,000 for acquisitions which primarily related to the accelerated closing of our
asset acquisition from Bexar Metropolitan Water District and rights to provide water service. In 2010, SJW Corp. used
approximately $95,500 of cash for Company funded capital expenditures, $4,400 for developer funded capital expenditures,
$4,500 for real estate investments which relate to the leasehold improvement additions for the office building located in
Knoxville, Tennessee, and $3,500 for acquisitions. These uses were offset by proceeds of $33,900 related to the sale of
California Water Service Group stock. In 2009, SJW Corp. used approximately $55,800 of cash for Company funded capital
expenditures, $1,500 for developer funded capital expenditures and $6,400 for acquisitions, of which $5,000 was paid for the
acquisition of the Bulverde service area and rights to provide water service and $1,400 was paid for the acquisition of certain
assets from Bexar Metropolitan Water District.
Water Utility Services budgeted capital expenditures for 2012, exclusive of capital expenditures financed by customer
contributions and advances is as follows:
Budgeted Capital
Expenditures
2012
Water treatment...........................................................................................................
$
Source of supply .........................................................................................................
Reservoirs and tanks ...................................................................................................
Pump stations and equipment .....................................................................................
Equipment and other...................................................................................................
Recycled water............................................................................................................
Distribution system.....................................................................................................
4,668
6,051
13,182
6,875
10,563
5,118
58,887
4%
6%
13%
7%
10%
5%
55%
$
105,344
100%
The 2012 capital expenditures budget is concentrated in main replacements. Included in the distribution system
budgeted capital expenditures of $58,887 is approximately $30,817 that is planned to be spent to replace Water Utility Services’
pipes and mains. Historically, amounts have been carried over from previous years’ budgets. Approximately $8,929 has been
carried over from prior years’ budgets and is included in the table above. In addition, $11,506 is included in the table above
related to reinvestment in utility plant associated with CPUC Resolution L-411A.
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, Water Utility Services expects to incur
approximately $579,000 in capital expenditures, which includes replacement of pipes and mains, and maintaining water
28
systems. This amount is subject to CPUC and TCEQ approval. In addition, San Jose Water Company requested the CPUC's
approval of upgrades to San Jose Water Company's 40-year old Montevina Water Treatment Plant. The total planned project
cost is $73,500 over the next four years. A decision on the application is expected in the second half of 2012. Capital
expenditures have the effect of increasing utility plant on which Water Utility Services earns a return. 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.
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 and increased regulation.
Cash Flow from Financing Activities
Net cash provided by financing activities for the year ended December 31, 2011 decreased by approximately $1,400
from the same period in the prior year. As the Company has increased its capital expenditures, funding for these has been made
possible, in part, from additional long-term borrowings which are used to pay down borrowings from the line of credit. Long-
term borrowings during the year ended December 31, 2011, consists of $50,000 in SJW Corp. unsecured senior notes. During
the prior year, San Jose Water Company issued $50,000 in California Pollution Control Financing Authority Revenue Bonds.
SJW Corp.’s cash management policy is to issue long-term debt to pay down borrowings on the lines of credit. As such, when
long-term borrowings are high, borrowings on the line of credit tend to be low and when long-term borrowings are low,
borrowings on the line of credit tend to be high.
SJW Corp., SJW Land Company and San Jose Water Company have lines of credit totaling $85,000, of which $3,000
has been set aside as security for its SDWSRF loans as of December 31, 2011. Our drawdowns on our lines of credit are
restricted by our funded debt not exceeding a percent of total capitalization as defined in our debt covenants. SJW Corp. expects
to periodically draw down on the lines of credit as dictated by our funding needs and subsequently repay such borrowings with
cash from operations and issuance of long-term debt or equity. 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 maintain or increase internally generated funds and attract external financing. 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 48% debt and 52% equity. The average borrowing rate of San Jose Water Company’s long-term
debt is 6.6%.
Company internally-generated funds, which include allowances for depreciation and deferred income taxes, have
provided approximately 50% of the cash requirements for San Jose Water Company’s capital expenditure. Funding for its future
capital expenditure program is expected to be provided primarily through internally-generated funds, the issuance of new long-
term debt, the issuance of equity or the sale of all or part of our investment in California Water Service Group, all of which will
be consistent with the regulator’s guidelines.
On June 30, 2011, SJW Corp. entered into a note agreement with the Prudential Insurance Company of America (the
“Purchaser”), pursuant to which the Company sold on the same date an aggregate principal amount of $50,000 of its 4.35%
senior notes to the Purchaser. The senior notes are unsecured obligations of the Company, due on June 30, 2021. Interest is
payable semi-annually in arrears on December 30th and June 30th of each year. SJW Corp.’s unsecured senior note agreement
has terms and conditions that restrict SJW Corp. from issuing additional funded debt if: (1) the funded consolidated debt would
exceed 66-2/3% of total capitalization, and (2) the minimum net worth of SJW Corp. becomes less than $175,000 plus 30% of
Water Utility Services cumulative net income, since June 30, 2011. As of December 31, 2011, SJW Corp. is not restricted from
issuing future indebtedness as a result of these terms and conditions.
San Jose Water Company has outstanding $200,000 of unsecured senior notes as of December 31, 2011. 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, 2011, San
29
Jose Water Company’s funded debt was 53% of total capitalization and the net income available for interest charges was 328%
of interest charges. As of December 31, 2011, San Jose Water Company is not restricted from issuing future indebtedness as a
result of these terms and conditions.
San Jose Water Company has outstanding $50,000 in California Pollution Control Financing Authority revenue bonds
as of December 31, 2011. The loan agreement for the revenue bonds contains affirmative and negative covenants customary for
a loan agreement relating to revenue bonds, including, among other things, complying with certain disclosure obligations and
covenants relating to the tax exempt status of the interest on the bonds and limitations and prohibitions relating to the transfer of
the projects funded by the loan proceeds and the assignment of the loan agreement. As of December 31, 2011, San Jose Water
Company was in compliance with all such covenants.
San Jose Water Company has received two loans in the aggregate principal amount of $3,076 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, 2011 is $2,464.
SJWTX, Inc., doing business as Canyon Lake Water Service Company, has outstanding $15,000 of senior notes as of
December 31, 2011. The senior note agreement has 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, 2011,
SJWTX, Inc. is in compliance with all terms and conditions. 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 consolidated debt
would exceed 66-2/3% of total capitalization, and (2) the minimum net worth of SJW Corp. becomes less than $125,000 plus
30% of Water Utility Services cumulative net income, since December 31, 2005. As of December 31, 2011, SJW Corp. is not
restricted from issuing future indebtedness as a result of these terms and conditions.
Real Estate Services
As of December 31, 2011, SJW Land Company’s outstanding balance of mortgages related to acquiring properties in
various states totaled $23,974. 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 5.79%.
As of December 31, 2011, SJW Land Company also had an outstanding mortgage loan in the amount of $3,248
borrowed by its subsidiary, 444 West Santa Clara Street, L.P. The mortgage loan was refinanced in March 2011. The new loan
required a cash call from the partnership of approximately $500, of which SJW Land Company contributed 70%, or
approximately $350. Monthly payments are being made in accordance with a 20-year amortization schedule at a fixed interest
rate of 5.68%, with a balloon payment required in 2021. 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 57% of total capitalization as of December 31, 2011.
Management believes that SJW Corp. is capable of obtaining future long-term capital to fund regulated and nonregulated
growth opportunities and capital expenditure requirements.
As of December 31, 2011, SJW Corp. and its subsidiaries had unsecured bank lines of credit, allowing aggregate short-
term borrowings of up to $85,000, of which $10,000 was available to SJW Corp. and SJW Land Company under a single line of
credit and $75,000 was available to San Jose Water Company under another line of credit. $3,000 under the San Jose Water
Company line of credit is set aside as security for its SDWSRF loans. At December 31, 2011, SJW Corp. and its subsidiaries
had available unused short-term bank lines of credit of $82,000. These lines of credit bear interest at variable rates. They will
expire on June 1, 2012. The cost of borrowing on SJW Corp.’s short-term credit facilities averaged 1.64% for 2011. SJW Corp.,
on a consolidated basis, has the following affirmative covenants on its unsecured bank line of credit: (1) the funded debt cannot
exceed 66-2/3% of total capitalization, and (2) net income available for interest charges for the trailing 12-calendar-month
period cannot be less than 175% of interest charges. As of December 31, 2011, SJW Corp’s funded debt was 57% of total
capitalization and the net income available for interest charges was 280% of interest charges. As such, as of December 31, 2011,
SJW Corp. was in compliance with all covenants. San Jose Water Company’s unsecured bank line of credit has the following
affirmative covenants: (1) the funded debt cannot exceed 66-2/3% of total capitalization, and (2) net income available for
interest charges for the trailing 12-calendar-month period cannot be less than 175% of interest charges. As of December 31,
2011, San Jose Water Company was in compliance with all covenants.
On February 3, 2011, SJW Corp. filed with the SEC a Form S-3 to provide stockholders the opportunity to participate in
SJW Corp.’s Dividend Reinvestment and Stock Purchase Plan. Such filing became effective on April 19, 2011.
30
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, 2011 are as follows:
Contractual Obligations Due in
Less than
1 Year
1-3
Years
3-5
Years
Senior notes, Water Utility Services............................
$
SJW Land Company mortgages...................................
Advances for construction, San Jose Water Company
SDWSRF loan, San Jose Water Company...................
444 West Santa Clara Street, L.P. long-term debt
(non-recourse to SJW Land Company)........................
California Pollution Control Financing Authority
Revenue Bonds, San Jose Water Company .................
Senior note, SJW Corp.................................................
Total contractual cash obligation .................................
Total interest on contractual obligations......................
$
$
Total
215,000
23,974
67,333
2,464
3,248
50,000
50,000
412,019
367,540
—
607
2,245
136
95
—
—
3,083
21,215
—
8,362
4,487
283
206
—
—
13,338
41,597
After
5 Years
215,000
11,360
56,114
1,748
—
3,645
4,487
297
231
2,716
—
—
8,660
41,213
50,000
50,000
386,938
263,515
In addition to the obligations listed above, San Jose Water Company issued two standby letters of credit with a
commercial bank in the amounts of $2,000 and $1,000 in support of its $1,546 and $918 SDWSRF loans which were funded in
2005 and 2008. The letters of credit automatically renew for one year each December and the amount of coverage can be
reduced as the loan principal balance decreases.
In regards to uncertain tax positions, we are unable to predict the timing of tax settlements as tax audits can involve
complex issues and the resolution of those issues may span multiple years, particularly if subject to negotiation or litigation.
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 ended December 31, 2011, 2010 and 2009, San Jose Water Company
purchased from SCVWD 21,900 million gallons ($43,500), 21,200 million gallons ($40,300) and 22,100 million gallons
($42,100), respectively, of contract water. 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 20,700 million gallons ($42,500) of water at the current
contract water rate of $2,053 per million gallons in the year ending December 31, 2012. Additionally, San Jose Water Company
purchases non-contract water from SCVWD on an “as needed” basis if the water supply is available. The contract water rates
for San Jose Water Company 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 rate for SCVWD’s fiscal years 2012, 2011 and 2010 was
$2,053, $1,903 and $1,903 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 2011, San Jose Water Company contributed $7,469 and $567 to the pension plan
and other post retirement benefit plan, respectively. In 2012, San Jose Water Company expects to make required and
discretionary cash contributions of up to $10,300 to the pension plan and other post retirement benefit plan. 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 a Special Deferral Election Plan. Under these benefit plans, San Jose Water
Company is committed to pay approximately $390 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.
31
CLWSC purchases water from GBRA under terms of agreements expiring in 2040, 2044 and 2050. The agreements,
which are take-or-pay contracts, provide CLWSC with 6,700 acre-feet per year of water supply from GBRA. The water rate
may be adjusted by GBRA at any time, provided they give CLWSC a 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 was constructed on the property of 444 West Santa Clara
Street, L.P. and is leased to an international real estate firm. The lease expires in August 2019. SJW Land Company
consolidates its limited partnership interest in 444 West Santa Clara Street, L.P. as a variable interest entity within the scope of
ASC Topic 810.
Impact of Recent Accounting Pronouncements
In May 2011, the FASB amended its guidance, to converge fair value measurement and disclosure guidance about fair
value measurement under U.S. GAAP with International Financial Reporting Standards. The amendment changes the wording
used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair
value measurements. For many of the requirements, the FASB does not intend for the amendment to result in a change in the
application of the requirements in the current authoritative guidance. The amendment becomes effective prospectively for our
interim reporting period ending March 31, 2012. Early application is not permitted. We do not expect the amendment to have a
material impact on the Company's financial position, results of operations or cash flows.
In December 2011, the FASB issued Accounting Standards Update 2011-12 that defers the effective date of the
requirement to present separate line items on the income statement for reclassification adjustments of items out of accumulated
other comprehensive income into net income. The deferral is temporary until the Board reconsiders the operational concerns
and needs of financial statement users. The Board has not yet established a timeline for its reconsideration. The Company is
currently in compliance with existing requirements, therefore, deferral of the new guidance is not expected to have a material
impact on the Company's financial position, results of operations or cash flows.
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, pension plan
asset values and equity prices. The exposure to changes in interest rates can result from the issuance of debt and short-term
funds obtained through the Company’s variable rate lines of credit. SJW Corp. also owns 385,120 shares of common stock of
California Water Service Group as of December 31, 2011, which is listed on the New York Stock Exchange, and is therefore
exposed to the risk of fluctuations and changes in equity prices.
SJW Corp. has no derivative financial instruments, financial instruments with significant off-balance sheet risks, or
financial instruments with concentrations of credit risk. There is no material sensitivity to changes in market rates and prices.
32
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, 2011 and 2010, and the related consolidated statements of income and comprehensive income, shareholders’
equity, and cash flows for each of the years in the three-year period ended December 31, 2011. In connection with our audits of
the consolidated financial statements, we also have audited the financial statement schedule. We also have audited SJW Corp.’s
internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The management of
SJW Corp. is responsible for these consolidated financial statements and financial statement schedule, 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 these consolidated financial statements and financial statement schedule and an
opinion on the Company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was maintained in
all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting 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 audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
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
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 generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and 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, 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, 2011 and 2010, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted
accounting principles. 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.
Also in our opinion, SJW Corp. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the COSO.
/s/ KPMG LLP
Santa Clara, California
February 29, 2012
33
SJW Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
Assets
Utility plant:
Land......................................................................................................................................
Depreciable plant and equipment ........................................................................................
Construction in progress......................................................................................................
Intangible assets...................................................................................................................
Less accumulated depreciation and amortization................................................................
Real estate investment ..........................................................................................................
Less accumulated depreciation and amortization .............................................................
Current assets:
Cash and cash equivalents ...................................................................................................
Accounts receivable:
Customers, net of allowances for uncollectible accounts of $225 in 2011 and $235 in
2010 .................................................................................................................................
Income tax .......................................................................................................................
Other................................................................................................................................
Accrued unbilled utility revenue...........................................................................................
Materials and supplies .........................................................................................................
Prepaid expenses..................................................................................................................
Other current asset...............................................................................................................
Other assets:
Investment in California Water Service Group....................................................................
Unamortized debt issuance, broker and reacquisition costs................................................
Regulatory assets, net...........................................................................................................
Other.....................................................................................................................................
December 31,
2011
2010
$
8,852
8,579
1,070,016
1,004,689
18,527
14,732
10,103
13,538
1,112,127
1,036,909
355,914
756,213
89,099
10,557
78,542
322,102
714,807
88,943
8,854
80,089
26,734
1,730
12,541
5,248
746
15,318
991
1,598
5,739
68,915
7,032
4,865
119,248
3,995
135,140
$
1,038,810
12,491
7,634
993
12,717
989
1,473
—
38,027
7,177
4,308
87,721
3,233
102,439
935,362
See Accompanying Notes to Consolidated Financial Statements.
34
SJW Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except share and per share data)
December 31,
2011
2010
Capitalization and Liabilities
Capitalization:
Shareholders’ equity:
Common stock, $0.521 par value; authorized 36,000,000 shares; issued and
outstanding 18,592,827 shares in 2011 and 18,551,540 shares in 2010.........................
Additional paid-in capital................................................................................................
Retained earnings............................................................................................................
Accumulated other comprehensive income .....................................................................
Total shareholders’ equity....................................................................................................
Long-term debt, less current portion....................................................................................
$
Current liabilities:
Line of credit ........................................................................................................................
Current portion of long-term debt........................................................................................
Accrued groundwater extraction charges and purchased water..........................................
Purchased power..................................................................................................................
Accounts payable..................................................................................................................
Accrued interest....................................................................................................................
Accrued property taxes and other non-income taxes ...........................................................
Accrued payroll ....................................................................................................................
Other current liabilities........................................................................................................
Deferred income taxes ..........................................................................................................
Unamortized investment tax credits ...................................................................................
Advances for construction ...................................................................................................
Contributions in aid of construction ...................................................................................
Deferred revenue...................................................................................................................
Postretirement benefit plans................................................................................................
Other noncurrent liabilities .................................................................................................
Commitments and contingencies.........................................................................................
9,684
24,552
227,494
2,274
264,004
343,848
607,852
—
838
5,789
423
7,417
5,376
1,298
2,744
4,403
28,288
133,541
1,495
67,333
123,335
1,070
68,855
7,041
—
9,662
23,443
219,568
2,359
255,032
295,704
550,736
4,000
1,133
4,359
495
5,487
5,244
1,288
2,720
4,429
29,155
106,406
1,555
68,352
121,803
1,100
50,213
6,042
—
$
1,038,810
935,362
See Accompanying Notes to Consolidated Financial Statements.
35
SJW Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31 (in thousands, except share and per share data)
Operating revenue...................................................................................
Operating expense:
Production Costs:
Purchased water ................................................................................
Power .................................................................................................
Groundwater extraction charges .......................................................
Other production costs.......................................................................
Total production costs.............................................................................
Administrative and general.....................................................................
Maintenance ...........................................................................................
Property taxes and other non-income taxes ...........................................
Depreciation and amortization...............................................................
Impairment on real estate investment.....................................................
Total operating expense...................................................................
Operating income ....................................................................................
Other (expense) income:
Interest on long-term debt.......................................................................
Mortgage and other interest expense......................................................
Loss on sale of utility property ...............................................................
Gain on sale of California Water Service Group stock..........................
Dividend income .....................................................................................
Other, net.................................................................................................
Income before income taxes....................................................................
Provision for income taxes .....................................................................
Net income ........................................................................................
Other comprehensive loss:
Unrealized loss on investment, net of taxes of $59 in 2011, $30 in
2010 and $4,334 in 2009 ........................................................................
Reclassification adjustment for gain realized on investment, net of tax
of $7,494 in 2010 ....................................................................................
Comprehensive income...............................................................
Earnings per share
—Basic ...................................................................................................
—Diluted ................................................................................................
Weighted average shares outstanding
2011
2010
2009
$
238,955
215,638
216,097
54,317
5,394
20,997
11,345
92,053
39,136
13,261
8,921
31,193
—
184,564
54,391
(17,799)
(1,876)
(23)
—
238
513
35,444
14,566
20,878
43,557
6,429
26,614
10,702
87,302
38,184
12,242
7,907
28,331
3,597
177,563
38,075
(15,676)
(2,007)
—
18,966
1,185
603
41,146
16,740
24,406
45,317
6,582
31,635
10,074
93,608
35,445
13,172
8,549
25,643
—
176,417
39,680
(13,996)
(1,974)
—
—
1,298
443
25,451
10,280
15,171
(85)
(44)
(6,236)
—
20,793
1.12
1.11
(10,784)
13,578
1.32
1.30
—
8,935
0.82
0.81
$
$
$
$
—Basic ...................................................................................................
—Diluted ................................................................................................
18,581,762
18,794,066
18,531,458
18,742,315
18,486,536
18,680,458
See Accompanying Notes to Consolidated Financial Statements.
36
SJW Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands, except share and per share data)
Balances, December 31, 2008........
Net income.....................................
Unrealized loss on investment, net
of tax effect of $4,334 ....................
Share-based compensation............
Exercise of stock options and
similar instruments........................
Employee stock purchase plan ......
Adjustment to equity interest in
CLWSC..........................................
Dividends paid ($0.66 per share)..
Balances, December 31, 2009........
Net income.....................................
Unrealized loss on investment, net
of tax effect of $30 .........................
Reclassification adjustment for
gain realized on investment, net of
tax effect of $7,494 ........................
Share-based compensation............
Exercise of stock options and
similar instruments........................
Employee stock purchase plan ......
Dividends paid ($0.68 per share)..
Balances, December 31, 2010........
Net income.....................................
Unrealized loss on investment, net
of tax effect of $59 .........................
Share-based compensation............
Exercise of stock options and
similar instruments........................
Employee stock purchase plan ......
Dividend reinvestment and stock
purchase plan ................................
Dividends paid ($0.69 per share)..
Balances, December 31, 2011........
Common Stock
Amount
Additional
Paid-in
Capital
Number of
Shares
18,452,447
—
—
—
22,481
24,674
—
—
9,611
20,548
—
—
—
11
13
—
—
—
—
897
102
499
—
—
18,499,602
9,635
22,046
—
—
—
—
26,078
25,860
—
—
—
—
—
14
13
—
—
—
—
812
86
499
—
18,551,540
9,662
23,443
—
—
—
13,896
25,712
1,679
—
—
—
—
7
14
1
—
—
—
651
(91)
511
38
—
18,592,827
9,684
24,552
Retained
Earnings
204,744
15,171
—
(122)
—
—
297
(12,202)
207,888
24,406
Accumulated
Other
Comprehensive
Income
19,423
—
(6,236)
—
—
—
—
—
13,187
—
Total
Shareholders’
Equity
254,326
15,171
(6,236)
775
113
512
297
(12,202)
252,756
24,406
—
(44)
(44)
—
(123)
(10,784)
—
—
—
(12,603)
219,568
20,878
—
(129)
—
—
—
(12,823)
227,494
—
—
—
2,359
—
(85)
—
—
—
—
—
2,274
(10,784)
689
100
512
(12,603)
255,032
20,878
(85)
522
(84)
525
39
(12,823)
264,004
See Accompanying Notes to Consolidated Financial Statements.
37
SJW Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 (in thousands)
2011
2010
2009
Operating activities:
Net income ..........................................................................................................................
Adjustments to reconcile net income to net cash provided by operating activities:
$
Depreciation and amortization .....................................................................................
Deferred income taxes ..................................................................................................
Share-based compensation ...........................................................................................
Gain on sale of California Water Service Group stock.................................................
Impairment of real estate investment............................................................................
Loss on sale of utility property......................................................................................
Changes in operating assets and liabilities:
Accounts receivable and accrued unbilled utility revenue ...........................................
Accounts payable, purchased power and other current liabilities ...............................
Accrued groundwater extraction charges and purchased water..................................
Tax receivable and accrued taxes.................................................................................
Accrued interest ............................................................................................................
Accrued payroll.............................................................................................................
Prepaid expenses and materials and supplies ..............................................................
Postretirement benefits..................................................................................................
Other current asset........................................................................................................
Other noncurrent assets and noncurrent liabilities ......................................................
Other changes, net ........................................................................................................
Net cash provided by operating activities..........................................................................
Investing activities:
Additions to utility plant:
Company-funded ...........................................................................................................
Contributions in aid of construction .............................................................................
Additions to real estate investment .....................................................................................
Cost to retire utility plant, net of salvage............................................................................
Payments for business/asset acquisition and water rights .................................................
Proceeds from sale of California Water Service Group stock............................................
Proceeds from sale of utility property.................................................................................
Net cash used in investing activities ...................................................................................
Financing activities:
Borrowings from line of credit............................................................................................
Repayments of line of credit................................................................................................
Long-term borrowings ........................................................................................................
Repayments of long-term borrowings.................................................................................
Debt issuance costs .............................................................................................................
Dividends paid ....................................................................................................................
Exercise of stock options and similar instruments..............................................................
Tax benefits realized from share options exercised.............................................................
Receipts of advances and contributions in aid of construction ..........................................
Refunds of advances for construction .................................................................................
Net cash provided by financing activities ..........................................................................
Net change in cash and cash equivalents ...........................................................................
Cash and cash equivalents, beginning of year...................................................................
Cash and cash equivalents, end of year .............................................................................
Cash paid (received) during the year for:
Interest ................................................................................................................................
Income taxes........................................................................................................................
Supplemental disclosure of non-cash activities:
(Decrease) increase in accrued payables ...........................................................................
Utility property installed by developers..............................................................................
Obligations (relieved) incurred related to acquisition of certain water service assets......
$
$
$
$
$
$
20,878
32,709
16,458
651
—
—
23
(2,470)
(133)
1,430
(1,102)
132
49
(127)
(37)
(5,740)
1,855
(372)
64,204
(62,439)
(7,311)
(156)
(1,816)
(4,040)
—
43
(75,719)
17,600
(21,600)
50,000
(1,094)
(87)
(12,823)
564
7
6,149
(2,197)
36,519
25,004
1,730
26,734
20,307
(2,930)
1,971
567
(726)
See Accompanying Notes to Consolidated Financial Statements.
38
24,406
29,756
8,077
812
(18,966)
3,597
—
(2,197)
887
(137)
(8,528)
265
316
128
(2,566)
—
1,166
151
37,167
(95,536)
(4,364)
(4,540)
(757)
(3,504)
33,938
—
(74,763)
62,300
(64,100)
50,000
(790)
(856)
(12,603)
692
41
5,428
(2,202)
37,910
314
1,416
1,730
18,070
15,326
(1,389)
341
—
15,171
27,017
6,305
897
—
—
—
1,670
(464)
(761)
2,011
413
(962)
(365)
3,034
—
398
182
54,546
(55,803)
(1,457)
—
(459)
(6,436)
—
—
(64,155)
14,100
(26,700)
30,000
(749)
—
(12,202)
551
74
4,846
(2,301)
7,619
(1,990)
3,406
1,416
15,609
2,255
1,142
1,457
1,389
SJW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2011, 2010 and 2009
(Dollars in thousands, except share data)
Note 1.
Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of SJW Corp., its wholly owned subsidiaries,
and two entities in which SJW Corp. is the primary beneficiary. All intercompany transactions and balances have been
eliminated in consolidation.
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 93% of San Jose Water Company’s revenues are derived from the sale of water to residential and
business customers.
SJWTX, Inc., a wholly owned subsidiary of SJW Corp., was incorporated in the State of Texas in 2005. SJWTX, Inc. is
doing business as Canyon Lake Water Service Company. On May 31, 2006, CLWSC purchased substantially all the assets of
Canyon Lake Water Supply Corporation. CLWSC is a public utility in the business of providing water service to approximately
10,000 connections that serve approximately 36,000 people. CLWSC’s service area comprises more than 243 square miles in
western Comal County and southern Blanco County in the growing region between San Antonio and Austin, Texas. SJWTX,
Inc. has a 25% interest in Acequia Water Supply Corporation. The water supply corporation has been determined to be a
variable interest entity within the scope of ASC Topic 810 with SJWTX, Inc. as the primary beneficiary, and as a result, it has
been consolidated with SJWTX, Inc.
SJW Land Company 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 ASC Topic 810 (see Note 9).
Texas Water Alliance Limited (“TWA”), a wholly owned subsidiary of SJW Corp., is undertaking activities that are
necessary to develop a water supply project in Texas.
Reclassifications
The Company reclassified $10,702 and $10,074 of costs incurred to support the delivery of water from other operating
expense to production costs and $8,050 and $7,787 from other operating expense to administrative and general related to
customer service costs for the years ended December 31, 2010 and 2009, respectively. In addition, the Company reclassified
income taxes out of operating expense and changed the presentation of other (expense) income items from a net to gross basis.
These reclassifications were made to conform to the current year presentation and impacted total production costs, total
operating expense and operating income. The Company believes these reclassifications provide investors with better operating
information and are in line with current practices of other water companies and CPUC guidance.
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
2011, 2010 and 2009 was $699, $555 and $300, respectively. Construction in progress was $18,527 and $10,103 at
December 31, 2011 and 2010, respectively.
39
The major components of depreciable plant and equipment as of December 31, 2011 and 2010 are as follows:
Equipment...................................................................................................................
Transmission and distribution.....................................................................................
Office buildings and other structures..........................................................................
Total depreciable plant and equipment.....................................................................
2011
2010
202,181
811,332
56,503
192,202
758,353
54,134
1,070,016
1,004,689
$
$
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:
Equipment ................................................................................................................................................
Transmission and distribution plant .........................................................................................................
Office buildings and other structures .......................................................................................................
Useful Lives
5 to 35 years
35 to 75 years
7 to 50 years
For the years 2011, 2010 and 2009, depreciation expense was approximately 3.5%, 3.5% and 3.4%, respectively, of the
beginning of the year balance of depreciable plant for all years. A portion of depreciation expense is allocated to administrative
and general expense. For the years 2011, 2010 and 2009, the amounts allocated to administrative and general expense were
$1,516, $1,425 and $1,374, respectively. Depreciation expense for utility plant for the years ended December 31, 2011, 2010
and 2009 was $29,141 $26,331 and $23,655, respectively. The cost of utility plant retired, including retirement costs (less
salvage), is charged to accumulated depreciation and no gain or loss is recognized.
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. Net gains and losses from the
sale of real estate investments are recorded as a component of other (expense) income in the Consolidated Statements of
Income and Comprehensive Income. Nonutility property in Water Utility Services is also classified in real estate investments
and not separately disclosed on the balance sheet based on the immateriality of the amount. Nonutility property 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. There is no depreciation associated with nonutility property as it is all land. The major components of real estate
investments as of December 31, 2011 and 2010 are as follows:
Land ............................................................................................................................
Buildings and improvements ......................................................................................
Intangibles...................................................................................................................
Total real estate investment .................................................................................
$
$
21,312
67,487
300
89,099
21,312
67,281
350
88,943
2011
2010
Depreciation on real estate investments is computed using the straight-line method over the estimated useful lives of the
assets, ranging from 5 to 39 years.
40
Land, buildings and improvements of $87,704 and $87,559 as of December 31, 2011 and 2010, respectively, represent
assets that are leased or available for lease. The following schedule shows the future minimum rental payments to be received
from third parties under operating leases that have remaining noncancelable lease terms in excess of one year as of
December 31, 2011:
Year ending December 31:
2012..........................................................................................................................................................
$
2013..........................................................................................................................................................
2014..........................................................................................................................................................
2015..........................................................................................................................................................
2016..........................................................................................................................................................
Thereafter .................................................................................................................................................
Rental
Revenue
4,541
4,564
4,588
4,664
4,780
27,688
Impairment of Long-Lived Assets
In accordance with the requirements of FASB ASC Topic 360—“Property, Plant and Equipment,” 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. When such changes in circumstances or events occur, the Company assesses recoverability by determining
whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. To the extent
an impairment exists, the asset is written down to its estimated fair value with a corresponding charge to operations in the
period in which the impairment is identified. Long-lived assets consist primarily of utility plant in service, real estate
investments, intangible assets, and regulatory assets. See Note 14 for a discussion of a recorded impairment as of December 31,
2010.
Financial Instruments
The carrying amount of SJW Corp.’s cash and cash equivalents, accounts receivable and accounts payable approximates
fair value as of the dates presented because of the short-term maturity of the instruments. The fair value of long-term debt is
discussed in Note 4, pension plan assets in Note 10, investment in California Water Service Group in Note 13 and fair value
measurement related to certain long-lived assets in Note 14.
Other Current Asset
Other current asset represents the remaining amount to be billed to customers in the next twelve months associated with
the Mandatory Conservation Revenue Adjustment Memorandum account. San Jose Water Company filed an advice letter on
June 2, 2010, with the CPUC requesting authorization to increase revenues by $5,740, or approximately 2.61%, of authorized
revenue at the time of the filing. This increase was intended to recover the accumulated balance in the MCRAM, which was in
effect from August 3, 2009 to May 1, 2010. The CPUC-authorized MCRAM was intended to track the revenue impact of
mandatory conservation upon San Jose Water Company’s quantity revenue resulting from mandatory conservation instituted by
the SCVWD. As directed by the CPUC’s Division of Water and Audits, the MCRAM would be recovered via a surcharge on the
existing quantity rate for a period of 12 months following final approval by the CPUC. Resolution W-4885 authorizing the
recovery was adopted by the Commission on December 15, 2011. The surcharge to begin recovering the balance was
subsequently implemented on December 27, 2011. All revenue was recognized immediately upon final approval by the CPUC.
Investment in California Water Service Group
SJW Corp.’s investment in California Water Service Group is accounted for under FASB ASC Topic 320—“Investments
—Debt and Equity Securities,” as an available-for-sale marketable security. The investment is recorded on the Consolidated
Balance Sheet at its quoted market price with the change in unrealized gain or loss reported, net of tax, as a component of other
comprehensive income (loss) (see Note 13).
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 ASC Topic 980. In accordance with ASC Topic 980, 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
41
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 Water Utility
Services through the ratemaking process. The regulatory assets and liabilities recorded by 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 obligations
that have not been passed through in rates. The Company expects to recover the income tax temporary differences over average
plant depreciation lives of 5 to 75 years.
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.
Regulatory assets and liabilities are comprised of the following as of December 31:
2011
2010
Regulatory assets:
Income tax temporary differences............................................................................
Postretirement pensions and other medical benefits ................................................
Other.........................................................................................................................
Total regulatory assets ................................................................................................
Regulatory liabilities:
Future tax benefits to ratepayers ..............................................................................
Net regulatory assets included in Consolidated Balance Sheets ................................
$
$
$
$
9,295
105,988
4,676
119,959
711
119,248
9,705
74,096
4,631
88,432
711
87,721
Regulatory Rate Filings
On January 3, 2012, San Jose Water Company filed a General Rate Case application requesting rate increases of
$47,400, or 21.51% in 2013, $13,000, or 4.87% in 2014 and $34,800, or 12.59% in 2015. This General Rate Case filing also
includes several “special requests”, including but not limited to: (1) recovery of the under-collected balance of $2,600 in the
balancing account, (2) disbursement of the over-collected balance of $700 accrued in various memorandum accounts and (3)
implementation of a full revenue decoupling Water Revenue Adjustment Mechanism and associated Modified Cost Balancing
Account. A final decision in this proceeding is likely to occur in the second half of 2012 with new rates becoming effective at
the beginning of 2013. If a decision is not reached by the end of 2012, the CPUC has mechanisms in place that will allow San
Jose Water Company to request interim rates, effective January 1, 2013, until a decision is adopted.
On August 27, 2010, CLWSC filed a rate case with the TCEQ. The filing contained a request for an immediate increase
in revenue of 38% and a total increase of 71%. The new rates (38%) became effective on October 27, 2010. CLWSC is also
requesting the TCEQ for a rate base determination. A rate base determination entails verification of plant to be included in rate
base by TCEQ staff. An evidentiary hearing on these matters has been scheduled for March 2012, and a TCEQ decision is
expected sometime in the second quarter of 2012. Until final approval by the TCEQ, the 38% rate increase in October 2010 is
subject to adjustment and refund.
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 the CPUC, investment tax credits resulting from utility plant additions are deferred and
amortized over the estimated useful lives of the related property.
42
Advances for Construction and Contributions in Aid of Construction
In California, advances for construction received after 1981 are refunded ratably over 40 years. Estimated refunds for
the next five years and thereafter are shown below:
2012........................................................................................................................................................
2013........................................................................................................................................................
2014........................................................................................................................................................
2015........................................................................................................................................................
2016........................................................................................................................................................
Thereafter ...............................................................................................................................................
Estimated Refunds
2,245
$
2,243
2,244
2,243
2,244
56,114
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.
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 and other anticipated clean-up costs, 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, 2011 and 2010, the asset retirement obligation is as follows:
Retirement obligation .................................................................................................
Discount rate...............................................................................................................
Present value, recorded as a liability ..........................................................................
Deferred tax ................................................................................................................
Regulatory asset..........................................................................................................
$
$
4,296
6%
1,481
1,019
2,500
4,253
6%
1,430
984
2,414
2011
2010
Revenue
SJW Corp. recognizes its regulated and nonregulated revenue when services have been rendered, in accordance with
ASC Topic 605.
Metered revenue of 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. 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 may result in
an adjustment to the operating revenue in the period which the revision to Water Utility Services’ estimates are determined.
Revenues also include a surcharge collected from regulated customers that is paid to the CPUC. This surcharge is
recorded both in operating revenues and administrative and general expenses. For the years ended December 31, 2011, 2010
and 2009, the surcharge was $3,272, $3,046 and $3,303 respectively.
Revenue from San Jose Water Company’s nonregulated utility operations, maintenance agreements or antenna leases
are recognized when services have been rendered. Nonregulated operating revenue in 2011, 2010 and 2009 includes $4,935,
43
$4,646 and $4,563, respectively, from the operation of the City of Cupertino municipal water system. Revenue from SJW Land
Company is recognized ratably over the term of the leases.
Balancing and Memorandum Accounts
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 the CPUC to offset those expense
changes. Since the amounts in the balancing accounts must be approved by the CPUC before they can be incorporated into
rates, San Jose Water Company does not recognize balancing accounts in its revenue until the CPUC authorizes a change in
customers’ rates related to any balancing account. As of December 31, 2011, the total balance in San Jose Water Company’s
balancing accounts, including interest, was an under-collection of $3,686.
The Company also maintains memorandum accounts to track revenue impacts due to catastrophic events, certain
unforeseen water quality expenses related to new federal and state water quality standards, energy efficiency and any revenue
requirement impact of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Rate recovery
for these memorandum accounts are generally allowed in the next general rate cases. As of December 31, 2011, the total
balance in San Jose Water Company’s memorandum-type accounts, including interest, was an over-collection of $255.
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 the grant date, the fair value of options granted and as the basis for the share-based
compensation for financial reporting purposes. In addition, SJW Corp. estimates forfeitures for share-based awards that are not
expected to vest.
SJW Corp. utilizes the Monte Carlo valuation model, which requires the use of subjective assumptions, to compute the
fair value of market performance-vesting restricted stock units.
The compensation cost charged to income is recognized on a straight-line basis over the requisite service period, which
is the vesting period.
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. The two-class method in computing basic earnings per share is not used because
the number of participating securities as defined in FASB ASC Topic 260—“Earnings Per Share” is not significant. (The two-
class method is an earnings allocation formula that determines earnings per share for each class of common stock and
participating security.) Diluted earnings per share is calculated using income available to common shareholders divided by the
weighted average number of shares of common stock including both shares outstanding and shares potentially issuable in
connection with stock options, deferred restricted common stock awards under SJW Corp.’s Long-Term Incentive Plan and
shares potentially issuable under the Employee Stock Purchase Plan. Anti-dilutive restricted common stock units and stock
options of 4,243, 3,201 and 5,851 as of December 31, 2011, 2010 and 2009, 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,
2011 and 2010, 18,592,827 and 18,551,540, respectively, shares of common stock were issued and outstanding.
At December 31, 2011 and 2010, 176,407 shares of preferred stock of $25 par value per share were authorized and none
were outstanding.
Note 3.
Lines of Credit
On July 1, 2011, SJW Corp., SJW Land Company and Wells Fargo Bank, National Association entered into an
amendment to their credit agreement dated May 27, 2010, as amended on December 16, 2010, to decrease the maximum
principal amount available under the line of credit from $45,000 to $10,000 and to modify the covenants regarding SJW Corp.'s
funded debt to capitalization ratio and earnings before interest and taxes coverage ratio.
On July 1, 2011, San Jose Water Company and Wells Fargo Bank, National Association entered into an amendment to
44
their credit agreement dated May 27, 2010, as amended December 16, 2010, to increase the maximum principal amount
available under the line of credit from $50,000 to $75,000 and to modify the earnings before interest and taxes coverage ratio
covenant.
As of December 31, 2011, SJW Corp. and its subsidiaries had unsecured bank lines of credit, allowing aggregate short-
term borrowings of up to $85,000. San Jose Water Company issued two standby letters of credit with a commercial bank in the
amount of $3,000 in support of its SDWSRF loans which were funded in 2005 and 2008. The letters of credit automatically
renew 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. As of December 31, 2011, $3,000 under the San Jose Water Company line of credit is set
aside as security for its SDWSRF loans. These lines of credit bear interest at variable rates and expire on June 1, 2012. As of
December 31, 2011 and 2010, SJW Corp. has an outstanding balance on the lines of credit of $0 and $4,000, respectively. Cost
of borrowing on the lines of credit averaged 1.64% and 1.98% as of December 31, 2011 and 2010, respectively.
Note 4.
Long-Term Debt
Long-term debt as of December 31 was as follows:
Description
Senior notes, San Jose Water Company:
Series A 8.58%............................................................................
Series B 7.37%............................................................................
Series C 9.45%............................................................................
Series D 7.15% ...........................................................................
Series E 6.81%............................................................................
Series F 7.20% ............................................................................
Series G 5.93% ...........................................................................
Series H 5.71% ...........................................................................
Series I 5.93%.............................................................................
Series J 6.54%.............................................................................
Series K 6.75% ...........................................................................
SJWTX, Inc. Series A 6.27%........................................................
SJW Corp. Series A 4.35%............................................................
Total senior notes ..............................................................
Mortgage loans 5.61% - 6.09%.....................................................
Bexar Metropolitan Water District obligation 6.50% imputed
interest, SJWTX, Inc. ....................................................................
444 West Santa Clara Street, L.P. 5.68% (non-recourse to
SJW Land Company) ....................................................................
California Pollution Control Financing Authority Revenue
Bonds 5.10%, San Jose Water Company ......................................
SDWSRF loans 2.39% and 2.60%, San Jose Water Company.....
Total debt ....................................................................................
Less: Current portion ..................................................................
Total long-term debt, less current portion...................................
Due Date
2011
2010
2022
2024
2020
2026
2028
2031
2033
2037
2037
2024
2039
2036
2021
2013
2016
2017
2013
2021
2040
2027
$
20,000
30,000
10,000
15,000
15,000
20,000
20,000
20,000
20,000
10,000
20,000
15,000
50,000
$
265,000
7,973
3,407
12,594
—
3,248
50,000
2,464
344,686
838
343,848
$
$
20,000
30,000
10,000
15,000
15,000
20,000
20,000
20,000
20,000
10,000
20,000
15,000
—
215,000
8,252
3,495
12,802
1,057
3,678
50,000
2,553
296,837
1,133
295,704
Senior notes held by institutional investors are unsecured obligations of San Jose Water Company and SJWTX, Inc. and
require interest-only payments until maturity. To minimize issuance costs, all of the companies’ debt has historically been
placed privately.
45
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, 2011, San Jose Water Company is not restricted from issuing future indebtedness as a result of these terms and
conditions.
The senior note agreement of SJWTX, Inc. has terms and conditions that restrict SJWTX, Inc. 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, 2011,
SJWTX, Inc. is in compliance with all terms and conditions. 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 consolidated debt
would exceed 66-2/3% of total capitalization, and (2) the minimum net worth of SJW Corp. becomes less than $125,000 plus
30% of Water Utility Services cumulative net income, since December 31, 2005. As of December 31, 2011, SJW Corp. is not
restricted from issuing future indebtedness as a result of these terms and conditions.
On June 30, 2011, SJW Corp. entered into a note agreement with the Prudential Insurance Company of America (the
“Purchaser”), pursuant to which the Company sold on the same date an aggregate principal amount of $50,000 of its 4.35%
senior notes to the Purchaser. The senior notes are unsecured obligations of the Company, due on June 30, 2021. Interest is
payable semi-annually in arrears on December 30th and June 30th of each year. SJW Corp.’s unsecured senior note agreement
has terms and conditions that restrict SJW Corp. from issuing additional funded debt if: (1) the funded consolidated debt would
exceed 66-2/3% of total capitalization, and (2) the minimum net worth of SJW Corp. becomes less than $175,000 plus 30% of
Water Utility Services cumulative net income, since June 30, 2011. As of December 31, 2011, SJW Corp. is not restricted from
issuing future indebtedness as a result of these terms and conditions.
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:
Year
2012...............................................................................................
2013...............................................................................................
2014...............................................................................................
2015...............................................................................................
2016...............................................................................................
Thereafter ......................................................................................
Amortization Schedule
Total Payment
Interest
Principal
1,992
9,096
1,229
1,229
4,034
11,470
1,385
1,086
877
856
762
110
607
8,010
352
373
3,272
11,360
In 2009, SJWTX, Inc. became obligated to purchase certain assets from Bexar Metropolitan Water District in a phased-
purchase transaction. As a result of this obligation, SJWTX, Inc. recorded a liability totaling $1,472. The phased asset purchase
originally required SJWTX, Inc. to complete the acquisition over a 4-year period and to make quarterly payments with an
imputed borrowing rate of 6.5%. At the end of the 4-year period, SJWTX, Inc. was to file with the TCEQ for permission to
purchase from Bexar Metropolitan Water District four public utility water distribution systems, including 12 well sites, one
wastewater system, and associated real and personal property, all located in Comal County, Texas. Following the satisfaction of
certain closing conditions, including obtaining TCEQ approval, SJWTX, Inc. was to purchase such additional assets and Bexar
Metropolitan Water District’s remaining interest in the assets for approximately $1,243 plus an amount per retail potable water
and wastewater customer connection then active in each of the four public utility water distribution systems. In May 2011, the
purchase agreement was amended to provide for, among other things, an accelerated closing. In December 2011, the transaction
closed and the obligation was settled for approximately $1,800.
46
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 $3,248 as of December 31, 2011. The mortgage loan was refinanced in March
2011. The new loan required a cash call from the partnership of approximately $500, of which SJW Land Company contributed
70%, or approximately $350. Monthly payments are being made in accordance with a 20-year amortization schedule at a fixed
interest rate of 5.68%, with a balloon payment required in 2021. The mortgage loan is secured by the partnership’s real property
and is non-recourse to SJW Land Company. An amortization schedule of the mortgage loan with 444 West Santa Clara Street,
L.P. is as follows:
Year
2012...............................................................................................
2013...............................................................................................
2014...............................................................................................
2015...............................................................................................
2016...............................................................................................
Thereafter ......................................................................................
Amortization Schedule
Total Payment
Interest
Principal
276
276
276
276
276
3,311
181
176
170
164
157
595
95
100
106
112
119
2,716
San Jose Water Company has outstanding $50,000 in California Pollution Control Financing Authority revenue bonds
as of December 31, 2011. The loan agreement for the revenue bonds contains affirmative and negative covenants customary for
a loan agreement relating to revenue bonds, including, among other things, complying with certain disclosure obligations and
covenants relating to the tax exempt status of the interest on the bonds and limitations and prohibitions relating to the transfer of
the projects funded by the loan proceeds and the assignment of the loan agreement. As of December 31, 2011, San Jose Water
Company was in compliance with all such covenants.
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, 2011 is $2,464. 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:
Year
2012...............................................................................................
2013...............................................................................................
2014...............................................................................................
2015...............................................................................................
2016...............................................................................................
Thereafter ......................................................................................
Amortization Schedule
Total Payment
Interest
Principal
196
196
196
196
196
1,983
60
56
53
49
46
235
136
140
143
147
150
1,748
The fair value of long-term debt as of December 31, 2011 and 2010 was approximately $433,873 and $344,105,
respectively, and was determined using a discounted cash flow analysis, based on the current rates for similar financial
instruments of the same duration and creditworthiness of the Company.
47
Note 5.
Income Taxes
The components of income tax expense were:
Current:
Federal ........................................................................................
$
State ............................................................................................
Deferred:
Federal ........................................................................................
State ............................................................................................
$
2011
2010
2009
(4,894)
3,002
16,560
(102)
14,566
3,738
4,925
10,694
(2,617)
16,740
717
3,258
7,140
(835)
10,280
The following table reconciles income tax expense to the amount computed by applying the federal statutory rate to
income before income taxes of $35,444, $41,146 and $25,451 in 2011, 2010 and 2009:
“Expected” federal income tax......................................................
$
12,405
14,026
8,653
2011
2010
2009
Increase (decrease) in taxes attributable to:
State taxes, net of federal income tax benefit .............................
Dividend received deduction ......................................................
Other items, net...........................................................................
1,934
(58)
285
$
14,566
2,397
(282)
599
16,740
1,710
(309)
226
10,280
The components of the net deferred tax liability as of December 31 was as follows:
2011
2010
Deferred tax assets:
Advances and contributions .....................................................................................
$
14,954
Unamortized investment tax credit ..........................................................................
Pensions and postretirement benefits .......................................................................
California franchise tax ............................................................................................
Net operating loss.....................................................................................................
Other.........................................................................................................................
Total deferred tax assets..............................................................................................
Deferred tax liabilities:
Utility plant ..............................................................................................................
Pension and postretirement benefits.........................................................................
Investment in stock...................................................................................................
Deferred gain and other-property related .................................................................
Debt reacquisition costs ...........................................................................................
Other.........................................................................................................................
Total deferred tax liabilities........................................................................................
Net deferred tax liabilities ..........................................................................................
$
$
$
$
48
805
4,644
1,429
2,495
1,181
25,508
96,349
43,199
2,488
15,287
595
1,131
15,311
837
4,665
774
—
1,053
22,640
79,532
30,200
2,548
15,212
644
910
159,049
133,541
129,046
106,406
Management evaluates the realizability of our deferred tax assets based on all available evidence, both positive and
negative. The realization of deferred tax assets is dependent on our ability to generate sufficient future taxable income during
periods in which the deferred tax assets are expected to reverse. Based on all available evidence, management believes it is
more likely than not that SJW Corp. will realize the benefits of these deferred tax assets.
As of December 31, 2011, the Company has a federal net operating loss carry forward of $7,129, which will expire in
fiscal year 2031.
The total amount of unrecognized tax benefits, before the impact of deductions for state taxes, excluding interest and
penalties was $1,874 and $1,166 as of December 31, 2011 and 2010, 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 $61 and
$615 as of December 31, 2011 and 2010, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at December 31, 2010.................................................................................................................
Additions based on tax position related to the current year, including interest .......................................
Reductions related to tax positions taken in a prior year, including interest............................................
Balance at December 31, 2011.................................................................................................................
$
$
1,254
997
(273)
1,978
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 $61 as of December 31, 2011. SJW Corp. has not accrued any penalties for unrecognized tax benefits.
SJW Corp. anticipates that its unrecognized tax benefits balance will change within the next 12 months following
December 31, 2011 due to lapsing statutes of limitations. This change is not expected to be material to the consolidated
financial statements. Through December 31, 2011, since the adoption of FASB ASC Topic 740—“Income Taxes”, a cumulative
reduction of $1,247 was recorded to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations.
The Company is currently undergoing an income tax examination by the Internal Revenue Service for its fiscal years
2008 and 2009. While management believes that the Company has adequately provided for all tax positions, amounts asserted
by tax authorities could be greater or less than the Company's current position. Accordingly, the Company's provisions on
federal tax related matters to be recorded in the future may change as revised estimates are made or the underlying matters are
settled or otherwise resolved. The Company does not expect its unrecognized tax benefits to change materially over the next 12
months.
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
Federal ..........................................................................................................................................
California......................................................................................................................................
Arizona .........................................................................................................................................
Connecticut...................................................................................................................................
Florida ..........................................................................................................................................
Tennessee......................................................................................................................................
Texas.............................................................................................................................................
Years Open
2008 - 2010
2007 - 2010
2007 - 2010
2008 - 2010
2008 - 2010
2008 - 2010
2007 - 2010
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 $7,932. Other intangibles consists of $6,533 which was paid for service area
and water rights related to our subsidiaries in Texas, $1,040 incurred in conjunction with Santa Clara Valley Water District
water contracts related to the operation of San Jose Water Company and $359 in other miscellaneous intangibles. 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.
49
Amortization expense for the intangible assets was $340 for the year ended December 31, 2011, $335 for the year ended
December 31, 2010 and $311 for the year ended December 31, 2009. Amortization expense for 2012, 2013, 2014, 2015 and
2016 is anticipated to be $340 per year.
The costs of intangible assets as of December 31, 2011 and 2010 are as follows:
Concession fees ..........................................................................................................
$
Other intangibles.........................................................................................................
Intangible assets..........................................................................................................
Less: Accumulated amortization
Concession fees ........................................................................................................
Other intangibles ......................................................................................................
Net intangible assets ...................................................................................................
$
6,800
7,932
14,732
3,876
643
10,213
6,800
6,738
13,538
3,604
575
9,359
2011
2010
Note 7.
Commitments
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 ended December 31, 2011, 2010 and 2009, San Jose Water Company
purchased from SCVWD 21,900 million gallons ($43,500), 21,200 million gallons ($40,300) and 22,100 million gallons
($42,100), respectively, of contract water. 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 20,700 million gallons ($42,500) of water at the current
contract water rate of $2,053 per million gallons in the year ending December 31, 2012. Additionally, San Jose Water Company
purchases non-contract water from SCVWD on an “as needed” basis if the water supply is available.
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 GBRA. The terms of the agreements expire in 2040, 2044 and 2050. The
agreements, which are take-or-pay contracts, provide CLWSC with 6,700 acre-feet per year of water supply from Canyon Lake
and other sources. The water rate may be adjusted by GBRA at any time, provided they give CLWSC a 60 day written notice on
the proposed adjustment.
As of December 31, 2011, San Jose Water Company had 347 employees, of whom 105 were executive, administrative
or supervisory personnel, and of whom 242 were members of unions. On November 23, 2010, San Jose Water Company
reached a three-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, 2011 through December 31, 2013. The agreements include a 2% wage increase in 2011, 2%
in 2012 and 3% in 2013 for union workers as well as increases in medical co-pays and dental deductibles.
Note 8.
Contingencies
SJW Corp. is subject to ordinary routine 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 SJW Corp.’s business, financial position, results of operations or cash flows.
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 unrelated international real
estate firm under a long-term lease expiring in August 2019.
The consolidated financial statements of SJW Corp. at December 31, 2011 and 2010 include the operating results of 444
50
West Santa Clara Street, L.P. Intercompany balances and transactions have been eliminated. Results of operations and balances
of the non-controlling interest are not material to the consolidated financial statements.
Note 10.
Benefit Plans
Pension Plans
San Jose Water Company sponsors a noncontributory defined benefit pension plan (the “Pension Plan”) for its
employees. Employees hired before March 31, 2008 are entitled to receive benefits under the Pension Plan using a benefit
formula based on the employee’s three highest years of compensation (whether or not consecutive). For employees hired on or
after March 31, 2008, benefits under the Pension Plan are determined using a cash balance formula based upon compensation
credits and interest credits for each employee.
The Pension Plan is administered by a committee that is composed of an equal number of Company and union
representatives (the “Committee”). The Committee has retained an investment consultant, presently Wells Fargo Advisors,
LLC, to assist it with, among other things, asset allocation strategy, investment policy advice, performance monitoring, and
manager due diligence. Investment decisions have been delegated by the Committee to investment managers. Investment
guidelines provided in the Investment Policy Statement require that at least 25% of plan assets be invested in fixed income
securities. As of December 31, 2011, the plan assets consist of approximately 42% bonds, 6% cash equivalents, and 52%
equities. Furthermore, equities are to be diversified by industry groups and selected to achieve a balance of long-term growth
and income combined with a goal of long-term preservation of capital. Except as provided for in the prospectus of any co-
mingled investments, investment managers may not invest in commodities and futures contracts, private placements, options,
letter stock, speculative securities, nor may they hold more than 5% of assets of any one private corporation. Except as provided
for in the prospectus of any co-mingled investments, fixed income assets may only be invested in bonds, commercial paper, and
money market funds with acceptable ratings by Moody’s or Standard & Poor’s as defined by the Investment Policy Statement.
The investment manager performance is reviewed regularly by the investment consultant who provides quarterly reports to the
Committee for review.
Plan assets are marked to market at each measurement date, resulting in unrealized actuarial gains or losses. Unrealized
actuarial gains and losses on pension assets are amortized over the expected future working lifetime of participants of 12.37
years for actuarial expense calculation purposes. Market gains in 2010 and 2009 decreased pension expense by approximately
$303 and $709 in 2011 and 2010, respectively.
Since the Pension Plan’s inception in 1984, the plan has achieved an 11.1% return on its investments while the
applicable benchmark was 10.3% for the same period. The applicable benchmark is a weighted-average of returns for those
benchmarks shown in the table below. For the 2011 fiscal year, the investment managers, following the required investment
guidelines, achieved a 0.4% return on their investments, while the applicable benchmark was 0.9% for the same period.
Generally, it is expected of the investment managers that the performance of the assets held in the Pension Plan,
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.
San Jose Water Company calculates the market-related value of our defined benefit pension plan assets, which is
defined under FASB ASC Topic 715—“Compensation—Retirement Benefits” as a balance used to calculate the expected return
on plan assets, using fair value. Fair value for San Jose Water Company is based on quoted prices in active markets for identical
assets and significant observable inputs.
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 $11,726 and $10,432 as of December 31, 2011 and
2010, respectively, and net periodic pension cost of $1,241, $1,209 and $808 for 2011, 2010 and 2009, 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.
51
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 ASC Topic 715. 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 San Jose Water Company. San Jose Water Company
contributions were $1,001, $962 and $974 in 2011, 2010 and 2009, respectively.
Special Deferral Election Plan and Deferral Election Program
SJW Corp. maintains a Special Deferral Election Plan allowing certain executives and a Deferral Election Program
allowing certain 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 $2,306, $2,103 and $1,890 to the plan as of
December 31, 2011, 2010 and 2009, respectively. San Jose Water Company recorded an investment return of $117, $98 and $76
as of December 31, 2011, 2010 and 2009, 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:
Discount rate......................................
Expected return on plan assets ..........
Rate of compensation increase ..........
Pension Benefits
Other Benefits
2011
%
5.48
7.00
4.00
2010
%
5.92/5.51
8.00/7.00
*
*
4.00
2009
%
6.06
8.00
4.00
2011
%
5.40
7.00
N/A
2010
%
5.83
8.00
N/A
2009
%
6.20
8.00
N/A
* San Jose Water Company updated its expected return on plan assets assumption in November 2010 to reflect the approved redistribution of investments
held between equity and fixed income securities in the plan asset portfolio. As a result, San Jose Water Company remeasured the plan assets and benefit
obligation as of that date and the discount rate applied was updated accordingly.
52
The expected rate of return on plan assets was determined based on a review of historical returns, both for this Pension
Plan and for medium- to large-sized defined benefit pension funds with similar asset allocations. This review generated separate
expected returns for each asset class. These expected future returns were then blended based on this Pension Plan's target asset
allocation.
Benefit obligations for the defined benefit plans and other postretirement benefits were calculated using the following
weighted-average assumptions as of December 31:
Discount rate ....................................................
Rate of compensation increase.........................
Pension Benefits
Other Benefits
2011
%
4.34
4.00
2010
%
5.48
4.00
2011
%
4.25
N/A
2010
%
5.40
N/A
San Jose Water Company utilized each plan's projected benefit stream in conjunction with the Citigroup Pension
Discount Curve in determining the discount rate used in calculating the pension and other postretirement benefits liabilities at
the measurement date.
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
2011
2010
2009
2011
2010
2009
Components of net periodic benefit
cost
Service cost ........................................
$
Interest cost ........................................
Expected return on assets...................
Amortization of transition obligation.
Amortization of prior service cost .....
Recognized actuarial loss...................
Net periodic benefit cost ....................
$
3,516
5,313
(4,289)
—
450
2,147
7,137
3,171
5,231
(3,599)
—
470
2,129
7,402
2,500
$
4,548
(2,945)
—
449
1,903
6,455
$
273
467
(129)
57
197
96
961
229
433
(130)
57
197
48
834
213
403
(115)
57
197
8
763
53
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
2011
2010
2011
2010
Change in benefit obligation
Benefit obligation at beginning of year.........
$
102,783
87,145
$
8,731
Service cost ...................................................
Interest cost ...................................................
Amendments .................................................
Actuarial loss.................................................
Benefits paid .................................................
Benefit obligation at end of year...................
Change in plan assets
Fair value of assets at beginning of year.......
Actual return on plan assets ..........................
Employer contributions.................................
Benefits paid .................................................
Fair value of plan assets at end of year .........
$
$
Funded status at end of year..........................
$
3,516
5,313
—
15,732
(3,440)
123,904
58,761
(27)
7,469
(3,440)
62,763
(61,141)
3,171
5,231
167
10,000
(2,931)
102,783
45,056
5,610
11,026
(2,931)
58,761
(44,022)
$
$
$
273
467
—
1,641
(316)
10,796
1,993
(20)
567
(219)
2,321
(8,475)
The amounts recognized on the balance sheet as of December 31 were as follows:
7,531
229
433
—
821
(283)
8,731
1,597
135
499
(238)
1,993
(6,738)
Current liabilities .............................................
Noncurrent liabilities .......................................
Pension Benefits
Other Benefits
2011
2010
2011
2010
$
$
705
60,436
61,141
494
43,528
44,022
$
$
56
8,419
8,475
53
6,685
6,738
Upon implementation of ASC Topic 715, 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:
Funded status of obligation.........................................................................................
Accrued benefit cost ...................................................................................................
Amount to be recovered in future rates ......................................................................
Tax gross-up................................................................................................................
Regulatory asset..........................................................................................................
$
$
69,616
(6,827)
62,789
43,199
105,988
50,760
(6,864)
43,896
30,200
74,096
2011
2010
54
The estimated amortization for the year ended December 31, 2012 is as follows:
Amortization of prior service cost ..............................................................................
Amortization of loss ...................................................................................................
Total............................................................................................................................
$
Plan Assets
Plan assets for the years ended December 31 were as follows:
Pension Benefits
414
$
3,642
4,056
Other Benefits
197
199
396
Pension Benefits
Other Benefits
2011
2010
2011
2010
Fair value of assets at end of year:
Debt securities .................................................
$
26,271
21,333
$
Equity securities ..............................................
Cash and equivalents .......................................
42%
32,653
52%
3,839
6%
36%
24,985
43%
12,443
21%
938
40%
921
40%
462
20%
785
39%
828
42%
380
19%
Total.................................................................
$
62,763
58,761
$
2,321
1,993
55
The following tables summarize the fair values of plan assets by major categories as of December 31, 2011 and 2010:
Fair Value Measurements at December 31, 2011
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Benchmark
Total
$
4,301
$
4,301
$
—
$
Asset Category
Cash and cash equivalents .......
Actively Managed (a):
U.S. Large Cap Equity ..........
Russell 1000 Growth
U.S. Small Mid Cap Equity ..
U.S. Small Cap Equity ..........
Emerging Market Equity.......
Non-U.S. Large Cap Equity ..
Passive Index Fund ETFs (b):
U.S. Large Cap Equity ..........
Russell 2500
Russell 2000
MSCI Emerging
Markets Net
MSCI EAFE Net
S&P 500/Russell 1000 Growth
U.S. Mid Cap Equity.............
Russell Mid Cap
U.S. Small Mid Cap Equity ..
U.S. Small Cap Equity ..........
Russell 2500
Russell 2000
Non-U.S. Large Cap Equity ..
MSCI EAFE Net
REIT......................................
Nareit—Equity REITS
Fixed Income (c)......................
Total..................................
(c)
3,716
1,814
6,303
3,547
4,271
5,525
69
617
143
4,356
3,213
27,209
3,716
1,814
6,303
3,547
4,271
5,525
69
617
143
4,356
—
—
—
—
—
—
—
—
—
3,213
27,209
$
65,084
$
34,662
$
30,422
$
—
—
—
—
—
—
—
—
—
—
—
___________________________________
The Plan has a current target allocation of 55% invested in a diversified array of equity securities to provide long-term capital appreciation and 45% invested in
a diversified array of fixed income securities to provide preservation of capital plus generation of income.
(a)
(b)
(c)
Actively managed portfolio of securities with the goal to exceed the stated benchmark performance.
Open-ended fund of securities with the goal to track the stated benchmark performance.
Actively managed portfolio of fixed income securities with the goal to exceed the Barclays Capital Aggregate Bond, Barclays Capital 1-3 Year
Government/Credit, Citigroup World Government Bond Index, and Merrill Lynch High Yield Master II performance.
56
Fair Value Measurements at December 31, 2010
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Asset Category
Cash and cash equivalents .......
Actively Managed (a):
Benchmark
Total
12,823
$
U.S. Large Cap Equity ..........
Russell 1000 Growth
U.S. Small Mid Cap Equity ..
U.S. Small Cap Equity ..........
Emerging Market Equity.......
Non-U.S. Large Cap Equity ..
Passive Index Fund ETFs (b):
Russell 2500
Russell 2000
MSCI Emerging
Markets Net
MSCI EAFE Net
3,822
1,850
5,961
62
101
U.S. Large Cap Equity ..........
S&P 500/Russell 1000 Growth
5,597
U.S. Mid Cap Equity.............
U.S. Small Mid Cap Equity ..
U.S. Small Cap Equity ..........
Russell Mid Cap
Russell 2500
Russell 2000
Non-U.S. Large Cap Equity ..
MSCI EAFE Net
REIT......................................
Nareit—Equity REITS
Fixed Income (c)......................
Total..................................
(c)
63
625
128
4,617
2,987
22,118
$
12,823
$
—
$
3,822
1,850
5,961
62
101
5,597
63
625
128
4,617
—
—
—
—
—
—
—
—
—
—
—
—
2,987
22,118
$
60,754
$
35,649
$
25,105
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
___________________________________
The Plan has a current target allocation of 55% invested in a diversified array of equity securities to provide long-term capital appreciation and 45% invested in
a diversified array of fixed income securities to provide preservation of capital plus generation of income.
(a)
(b)
(c)
Actively managed portfolio of securities with the goal to exceed the stated benchmark performance.
Open-ended fund of securities with the goal to track the stated benchmark performance.
Actively managed portfolio of fixed income securities with the goal to exceed the Barclays Capital Aggregate Bond, Barclays Capital 1-3 Year
Government/Credit, and Merrill Lynch High Yield Master II performance.
In 2012, San Jose Water Company expects to make required and discretionary cash contributions of up to $10,300 to the
pension plan and other post retirement benefit plan.
Benefits expected to be paid in the next five years and in the aggregate for the five years thereafter are:
Pension Plan
Other Postretirement
Benefit Plan
2012..................................................................................................................
$
4,075
$
2013..................................................................................................................
2014..................................................................................................................
2015..................................................................................................................
2016..................................................................................................................
2017 – 2021 ........................................................................................................
4,332
4,573
4,853
5,187
31,273
376
411
436
469
505
3,021
Note 11.
Equity Plans
Common Stock
SJW Corp. has a Long-Term Stock Incentive Plan (the “Plan”), which has 1,800,000 shares of common stock reserved
for issuance. The Plan was initially adopted by the Board of Directors on March 6, 2002. The Plan was subsequently amended,
and the 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 of any parent or
subsidiary, consultants, and other independent advisors who provide services to the Company or any parent or subsidiary the
57
opportunity to acquire an equity interest in SJW Corp.
A participant in the Plan generally may not receive Plan awards covering an aggregate of more than 600,000 shares of
common stock in any calendar year. Additionally, awards granted under the Plan may be conditioned upon the attainment of
specified Company performance goals. The types of awards included in the Plan are restricted stock awards, restricted stock
units, performance shares, or other share-based awards. In addition, shares are issued to employees under the Employee Stock
Purchase Plan (“ESPP”). SJW Corp. also has a Dividend Reinvestment and Stock Purchase Plan (“DRSPP”) which allows
eligible participants to buy shares and reinvest cash dividends in SJW Corp. common stock. As of December 31, 2011, 2010
and 2009, 235,473, 213,207 and 178,759 shares have been issued pursuant to the Plan, and 363,700, 378,903 and 352,012
shares are issuable upon the exercise of outstanding options, restricted stock units, and deferred restricted stock units for the
years ended 2011, 2010 and 2009, respectively. The remaining shares available for issuance under the Plan are 1,200,827,
1,207,890 and 1,269,229 for the years ended 2011, 2010 and 2009, respectively. The compensation costs charged to income is
recognized on a straight-line basis over the requisite service period. A summary of compensation costs charged to income,
proceeds from the exercise of stock options and similar instruments and the tax benefit realized from stock options and similar
instruments exercised, that are recorded to additional paid-in capital and common stock, by award type, are presented below for
the years ended December 31:
2011
2010
2009
Compensation costs charged to income:
Stock options ..........................................................................................
ESPP .......................................................................................................
Restricted stock and deferred restricted stock ........................................
Total compensation costs charged to income............................................
Proceeds from the exercise of stock options and similar instruments:
Stock options ..........................................................................................
ESPP .......................................................................................................
Restricted stock and deferred restricted stock ........................................
DRSPP ....................................................................................................
Other .......................................................................................................
Total proceeds from the exercise of stock options and similar
instruments ................................................................................................
Excess tax benefits realized from share options exercised and stock
issuance:
Stock options ..........................................................................................
Restricted stock and deferred restricted stock ........................................
Total excess tax benefits realized from share options exercised and
stock issuance............................................................................................
$
$
$
$
$
$
—
92
559
651
—
525
—
39
—
564
—
7
7
—
90
722
812
180
512
—
—
—
692
41
—
41
11
90
796
897
29
512
10
—
—
551
3
71
74
Stock Options
SJW Corp. applies FASB ASC Topic 718—“Compensation—Stock Compensation,” for all existing and new share-
based compensation plans. To estimate the fair value of options at grant date as the basis for the share-based compensation
awards, SJW Corp. utilizes the Black-Scholes option-pricing model, which requires the use of subjective assumptions. Further,
as required under ASC Topic 718, 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 and the
amount and timing of expense recognition.
Awards in the form of stock options 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.
58
As of December 31, 2011, all outstanding options were fully vested. A summary of SJW Corp.’s stock option awards as
of December 31, 2011, and changes during the year ended December 31, 2011, is presented below:
Shares
Weighted-
Average Exercise
Price
Weighted
Average
Remaining
Life in Years
Aggregate
Intrinsic
Value
Outstanding as of January 1, 2011...............................
85,526
$
18.24
3.73
$
Granted......................................................................
Exercised ...................................................................
Forfeited or expired...................................................
Outstanding as of December 31, 2011.........................
Options exercisable at December 31, 2011 .................
—
—
—
85,526
85,526
$
$
—
—
—
18.24
18.24
—
—
—
2.73
2.73
$
$
721
—
—
—
518
518
The total intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009, was $0, $133,
and $13, respectively.
As of December 31, 2011, there are no unrecognized compensation costs related to stock options.
Restricted Stock and Deferred Restricted Stock
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 will be made under
the Deferred Restricted Stock Program with respect to Board service after December 31, 2007.
On January 3, 2011, restricted stock units covering an aggregate of 13,631 shares of common stock of SJW Corp. were
granted to several executives of SJW Corp. and its subsidiaries. The units vest in four equal successive installments upon
completion of each year of service with no dividend equivalent rights. Share-based compensation expense is being recognized
at grant date fair value of $23.70 per unit over the vesting period beginning in 2011.
On January 25, 2011, market performance-vesting restricted stock units granted to a key executive of SJW Corp. on
April 30, 2008 covering 7,000 shares of common stock of SJW Corp. were canceled because the market performance objective
was not attained. However, since the requisite service over the three-year service period of the award was rendered, even
though the market condition was not achieved, compensation cost recognized over the three-year requisite service period was
not reversed.
On April 25, 2011, a total of 149 shares of common stock were distributed to a retired member of SJW Corp.'s Board of
Directors. There was no excess tax benefit realized from this stock issuance.
On June 30, 2011, an executive of SJW Corp. retired from the Company and as a result, a total of 4,725 unvested
restricted shares were forfeited. Compensation costs of $22 previously recognized relating to these unvested shares was
reversed during the second quarter of 2011.
On October 4, 2011, a total of 759 shares of common stock were distributed to a key employee of SJW Corp. There was
no excess tax benefit realized from this stock issuance.
A summary of SJW Corp.'s restricted and deferred restricted stock awards as of December 31, 2011, and changes during
the year ended December 31, 2011, is presented below:
Outstanding as of January 1, 2011..............................................................................
Issued........................................................................................................................
Exercised ..................................................................................................................
Forfeited or expired ..................................................................................................
Outstanding as of December 31, 2011........................................................................
Shares vested as of December 31, 2011 .....................................................................
59
Units
268,266
13,631
(22,255)
(11,725)
247,917
162,649
$
$
$
$
$
$
Weighted
Average Grant-
Date Fair Value
16.39
23.70
24.64
16.59
16.04
16.09
A summary of the status of SJW Corp.’s nonvested restricted and deferred restricted stock awards as of December 31,
2011, and changes during the year ended December 31, 2011, is presented below:
Nonvested as of January 1, 2011 ................................................................................
Granted .....................................................................................................................
Vested.......................................................................................................................
Forfeited ...................................................................................................................
Nonvested as of December 31, 2011 ..........................................................................
Units
105,479
13,631
(22,117)
(11,725)
85,268
Weighted Grant-
Date Fair Value
16.82
$
$
$
$
$
23.70
24.55
16.59
15.95
As of December 31, 2011, the total unrecognized compensation costs related to restricted and deferred restricted stock
plans amounted to $717. This cost is expected to be recognized over a weighted-average period of 1.45 years.
Dividend Equivalent Rights
Under the Plan, certain holders of options, restricted stock and deferred restricted stock awards may have the right to
receive dividend equivalent rights (“DERs”) each time a dividend is paid on common stock after the grant date. Stock
compensation on DERs is recognized as a liability and recorded against retained earnings on the date dividends are issued.
The Deferred Restricted Stock and Deferral Election Programs for non-employee Board members were amended
effective January 1, 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 Deferred Restricted Stock and Deferral Election Program.
As of December 31, 2011, 2010 and 2009, a cumulative of 50,888, 45,731 and 40,318 dividend equivalent rights were
converted, since inception, to deferred restricted stock awards, respectively. For the years ended December 31, 2011, 2010 and
2009, $129, $123 and $122 related to dividend equivalent rights were 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 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 eleven purchase intervals. As of December 31, 2011, 2010 and 2009, a total of
25,712, 25,860 and 24,674 shares, respectively, have been issued under the ESPP. The ESPP has no look-back provisions. As of
December 31, 2011, 2010 and 2009, cash received from employees towards the ESPP amounted to $548, $512 and $537,
respectively.
After considering estimated employee terminations or withdrawals from the plan before the purchase date, for the years
ended December 31, 2011, 2010 and 2009, SJW Corp.’s recorded expenses were $96, $90 and $90 related to the ESPP.
The total unrecognized compensation costs related to the semi-annual offering period that ends January 31, 2012 for the
ESPP is approximately $8. This cost is expected to be recognized during the first quarter of 2012.
Note 12.
Segment and Nonregulated Businesses Reporting
SJW Corp. is a holding company with four 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., operate commercial building rentals, (iii) SJWTX, Inc. which is doing business as Canyon Lake Water
Service Company, a regulated water utility located in Canyon Lake, Texas, and its consolidated nonregulated variable interest
entity, Acequia Water Supply Corporation, and (iv) Texas Water Alliance Limited, a nonregulated water utility operation which
is undertaking activities that are necessary to develop a water supply project in Texas. In accordance with FASB ASC Topic 280
—“Segment Reporting,” 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,
Canyon Lake Water Service Company and Texas Water Alliance, together referred to as “Water Utility Services”. The second
segment is property management and investment activity conducted by SJW Land Company, referred to as “Real Estate
60
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.
Water Utility Services
Regulated
229,411
175,812
53,599
21,970
29,136
16,741
Non
regulated
4,935
3,481
1,454
765
360
—
For year ended December 31, 2011
Real
Estate
Services
Non
regulated
All Other (1)
Non
regulated
4,609
3,240
1,369
(407)
1,697
—
2,031
(2,031)
(1,450)
—
SJW Corp.
Non
regulated
9,544
8,752
792
(1,092)
2,057
Regulated
229,411
175,812
53,599
21,970
29,136
Total
238,955
184,564
54,391
20,878
31,193
1,833
1,101
16,741
2,934
19,675
15,387
917,580
571
11,668
(296)
80,097
(1,096)
29,465
15,387
917,580
(821)
121,230
14,566
1,038,810
Operating revenue.......................
Operating expense ......................
Operating income (loss)..............
Net income (loss)........................
Depreciation and amortization....
Senior note, mortgage and other
interest expense...........................
Income tax expense (benefit) in
net income...................................
Assets..........................................
For year ended December 31, 2010
Operating revenue.......................
Operating expense ......................
Operating income (loss)..............
Net income (loss)........................
Depreciation and amortization....
Senior note, mortgage and other
interest expense...........................
Income tax expense (benefit) in
net income...................................
Assets..........................................
Water Utility Services
Regulated
207,432
164,976
42,456
16,818
26,319
15,917
11,496
844,364
Non
regulated
4,646
3,139
1,507
846
347
—
600
9,849
Real
Estate
Services (2)
Non
regulated
All Other (1)
Non
regulated
SJW Corp.
Non
regulated
8,206
12,587
(4,381)
7,588
2,012
Regulated
207,432
164,976
42,456
16,818
26,319
Total
215,638
177,563
38,075
24,406
28,331
15,917
1,766
17,683
—
2,590
(2,590)
9,908
—
6
6,820
(212)
11,496
844,364
5,244
90,998
16,740
935,362
3,560
6,858
(3,298)
(3,166)
1,665
1,760
(2,176)
81,361
61
Water Utility Services
Regulated
207,707
166,950
40,757
15,973
23,622
14,118
11,459
750,194
Non
regulated
4,563
3,143
1,420
841
344
—
578
6,569
For year ended December 31, 2009
Real
Estate
Services
Non
regulated
All Other (1)
Non
regulated
3,827
4,372
(545)
(1,424)
1,677
—
1,952
(1,952)
(219)
—
SJW Corp.
Non
regulated
8,390
9,467
(1,077)
(802)
2,021
Regulated
207,707
166,950
40,757
15,973
23,622
Total
216,097
176,417
39,680
15,171
25,643
1,826
26
14,118
1,852
15,970
(1,139)
81,177
(618)
40,534
11,459
750,194
(1,179)
128,280
10,280
878,474
Operating revenue.......................
Operating expense ......................
Operating income (loss)..............
Net income (loss)........................
Depreciation and amortization....
Senior note, mortgage and other
interest expense...........................
Income tax expense (benefit) in
net income...................................
Assets..........................................
____________________
(1)
(2)
expense. Taxes of $1,466 is included in net income. No impairments occurred during the same period in 2011 and 2009.
The “All Other” category is SJW Corp., on a stand-alone basis.
For the year ended December 31, 2010, an impairment on real estate investment of $3,597 is included in operating
Note 13.
Sale of California Water Service Group Stock
During the year ended December 31, 2010, SJW Corp. sold 907,392 shares of California Water Service Group for
$33,938, before fees of $273. SJW Corp. recognized a gross gain on the sale of the stock of approximately $18,966, tax expense
of approximately $7,776, for a net gain of $11,190. The unrealized holding gain associated with the shares sold, that was
reclassified out of accumulated other comprehensive income was $10,784 and was based on the fair value of the stock as of
June 30, 2010 and September 30, 2010. No sales of California Water Service Group stock occurred during the same period in
2011.
SJW Corp. classifies its investment in California Water Service Group as available-for-sale. The stock is carried at the
quoted market price with the changes in unrealized gain or loss reported, net of tax, as a component of other comprehensive
income. As of December 31, 2011, SJW Corp. held 385,120 shares of California Water Service Group. The increase in shares
from the prior year was due to a two-for-one stock split during the year of California Water Service Group's common stock. The
following table summarizes the fair value of our investment in California Water Service Group as of December 31, 2011 and
2010:
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Balance as of
December 31, 2011
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets:
Investment in California Water Service Group...
$
7,032
$
7,032
—
—
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Balance as of
December 31, 2010
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets:
Investment in California Water Service Group...
$
7,177
$
7,177
—
—
62
Note 14.
Impairment of Tennessee Distribution Facility
On December 3, 2010, SJW Land Company granted an option to a third-party for the sale of one of its nonregulated real
estate investments, a distribution facility located in Knoxville, Tennessee and approximately 30 acres of land on which the
facility is located for $16,500. The Company determined that signing the option agreement represented a change in
circumstances in the intended use of such facility and land and since the option price was below its current carrying value,
impairment indicators existed. Accordingly, the Company performed a recoverability test of estimated future cash flows from
the facility in accordance with ASC Topic 360. The Company determined that the carrying value was not recoverable through
estimated future cash flows from the exercise of the option.
The Company measured the fair value using a combination of the income approach and the market approach. The
market approach included the use of prices and other relevant information generated by market transactions involving identical
or comparable assets. The income approach included the use of a discounted cash flow model, which required the use of
unobservable inputs, including assumptions of projected revenue, expenses, and other costs, a terminal value as well as a
discount rate of 9% based on a risk free borrowing rate, adjusted for risk. We also used the purchase option price as it
represented a strong, observable market indicator of fair value defined in FASB ASC Topic 820—“Fair Value Measurements
and Disclosures” as the price that would be received to sell an asset in an orderly transaction between market participants. The
Company then applied a probability weighting on potential outcomes of the above three valuation methods, applying a
weighting of 35% for the average result of the income and market approaches and 65% for the option price, to determine fair
value. These measurements are classified as Level 3, as we used unobservable inputs to the valuation methodologies that were
significant to the fair value measurements, and the valuations required management judgment due to the absence of quoted
market prices. As a result, SJW Land Company recognized a pre-tax impairment loss on the building and land in the fourth
quarter of 2010 of approximately $3,597. On January 14, 2011, SJW Land Company was notified by the optionee that they
were terminating the option agreement.
The following table presents the long-lived asset that was measured and recorded at fair value on a non-recurring basis
during the year ended December 31, 2010, and the loss recorded during that same period. No impairments occurred during 2011
or 2009.
Fair Value Measured and Recorded Using
Net
Carrying
Value
as of
Dec. 31,
2010
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Loss
for Year
Ended
Dec. 31,
2010
Assets:
Tennessee distribution facility..........
$
15,181
—
—
$
15,181
$
3,597
63
Note 15.
Unaudited Quarterly Financial Data
Summarized quarterly financial data is as follows:
March
June
September
December
2011 Quarter Ended
Operating revenue .......................................................
$
Operating income ........................................................
Net income...................................................................
Comprehensive income ...............................................
Earnings per share:
—Basic......................................................................
—Diluted...................................................................
Market price range of stock:
—High.......................................................................
—Low .......................................................................
Dividend per share.......................................................
43,696
5,601
610
599
0.03
0.03
26.40
22.48
0.17
59,007
13,784
5,451
5,479
0.29
0.29
24.24
21.99
0.17
73,914
18,486
8,215
7,988
0.44
0.44
24.80
21.16
0.17
62,338
16,520
6,602
6,727
0.36
0.35
24.93
21.10
0.17
March
June
September
December
2010 Quarter Ended
Operating revenue .......................................................
$
Operating income ........................................................
Net income...................................................................
Comprehensive income ...............................................
Earnings per share:
—Basic......................................................................
—Diluted...................................................................
Market price range of stock:
—High.......................................................................
—Low .......................................................................
Dividend per share.......................................................
40,411
5,337
985
1,498
0.05
0.05
26.12
21.76
0.17
54,128
11,345
4,516
3,276
0.24
0.24
28.23
22.78
0.17
70,347
17,922
10,787
8,906
0.58
0.58
26.20
22.57
0.17
50,752
3,471
8,118
(102)
0.45
0.43
27.88
23.88
0.17
64
SJW CORP.
FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years ended December 31, 2011, 2010 and 2009
(in thousands)
Schedule II
Description
Allowance for doubtful accounts:
Balance, beginning of period......................................................
Charged to expense.....................................................................
Accounts written off ...................................................................
Recoveries of accounts written off .............................................
Balance, end of period ................................................................
Reserve for litigation and claims:
Balance, beginning of period......................................................
Charged to expense.....................................................................
Revision to accrual, due to settlements.......................................
Payments.....................................................................................
Balance, end of period ................................................................
$
$
$
$
2011
2010
2009
235
327
(422)
85
225
449
121
(182)
(148)
240
285
301
(472)
121
235
417
538
(245)
(261)
449
279
475
(577)
108
285
668
429
(280)
(400)
417
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 to evaluate the effectiveness of internal control over financial
reporting.
SJW Corp.’s management has performed an assessment of the effectiveness of internal control over financial reporting
as of December 31, 2011. Based on this assessment, management has concluded SJW Corp.’s internal control over financial
reporting as of December 31, 2011 is effective.
KPMG LLP has audited the effectiveness of the Company’s internal control over financial reporting as of December 31,
65
2011. Its 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 2011 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 in SJW Corp.’s Proxy Statement for its 2012 Annual Meeting of Shareholders to be held on April 25,
2012 (the “2012 Proxy Statement”) under the captions “Proposal 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, free of charge, at the Company’s website at http://
www.sjwcorp.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.sjwcorp.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
Item 11.
Executive Compensation
The information required by this item is contained in the 2012 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 2012 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 2012 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 2012 Proxy Statement under the caption “Principal
Independent Accountants’ Fees and Services” and is incorporated herein by reference.
66
Item 15.
Exhibits and Financial Statement Schedules
PART IV
(a)(1) Financial Statements
Report of Independent Registered Public Accounting Firm ................................................................................
Consolidated Balance Sheets as of December 31, 2011 and 2010.......................................................................
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2011,
2010 and 2009 ......................................................................................................................................................
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2011, 2010
and 2009 ...............................................................................................................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009.....................
Notes to Consolidated Financial Statements........................................................................................................
(a)(2) Financial Statement Schedule
Valuation and Qualifying Accounts and Reserves, Years ended December 31, 2011, 2010 and 2009................
Page
33
34
36
37
38
39
65
All other schedules are omitted as the required information is inapplicable or the information is presented in the
consolidated 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.
67
EXHIBIT INDEX
Exhibit No.
3.1
Description
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
3.3
4
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
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.
By-Laws of SJW Corp., as amended on July 28, 2010. Incorporated by reference to Exhibit 3.1 to Form
8-K filed on July 29, 2010.
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.
Indenture dated as of June 1, 2010 between San Jose Water Company and Wells Fargo Bank, National
Association. Incorporated by reference to Exhibit 4.1 to Form 10-Q for the quarter ended June 30,
2010.
4.35% Senior Notes due June 30, 2021. SJW Corp. agrees to furnish a copy of such Senior Notes to
the Commission upon request.
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.
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.
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.
Credit Agreement dated as of May 27, 2010 by and between SJW Corp., SJW Land Company and
Wells Fargo Bank, National Association. Incorporated by reference to Exhibit 10.1 to Form 8-K filed
on May 28, 2010.
First Amendment to Credit Agreement by and between SJW Corp., SJW Land Company and Wells
Fargo Bank, National Association dated December 16, 2010 and First Modification to Promissory Note
dated December 16, 2010. Incorporated by reference to Exhibit 10.1 to Form 8-K filed on
December 17, 2010.
Second Amendment to Credit Agreement by and between SJW Corp., SJW Land Company and Wells
Fargo Bank, National Association dated July 1, 2011 and Second Modification to Promissory Note
dated July 1, 2011. Incorporated by reference as Exhibit 10.1 to Form 8-K filed on July 7, 2011.
Third Modification to Promissory Note dated August 1, 2011 by and between SJW Corp., SJW Land
Company and Wells Fargo Bank, National Association. Incorporated by reference as Exhibit 10.3 to
Form 10-Q for the quarter ended September 30, 2011.
Credit Agreement dated as of May 27, 2010 by and between San Jose Water Company and Wells Fargo
Bank, National Association. Incorporated by reference to Exhibit 10.2 to Form 8-K filed on May 28,
2010.
First Amendment to Credit Agreement by and between San Jose Water Company and Wells Fargo
Bank, National Association dated December 16, 2010 and First Modification to Promissory Note dated
December 16, 2010. Incorporated by reference to Exhibit 10.1 to Form 8-K filed on December 17,
2010.
Second Amendment to Credit Agreement by and between San Jose Water Company and Wells Fargo
Bank, National Association dated July 1, 2011 and Second Modification to Promissory Note dated July
1, 2011. Incorporated by reference as Exhibit 10.2 to Form 8-K filed on July 7, 2011.
Third Modification to Promissory Note dated July 27, 2011 by and between San Jose Water Company
and Wells Fargo Bank, National Association. Incorporated by reference as Exhibit 10.4 to Form 10-Q
for the quarter ended September 30, 2011.
68
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
Loan Agreement dated as of June 1, 2010 between the California Pollution Control Financing
Authority and San Jose Water Company. Incorporated by reference to Exhibit 10.3 to Form 10-Q for
the quarter ended June 30, 2010.
Bond Purchase agreement dated June 9, 2010 among Goldman, Sachs & Co., the Treasurer of the State
of California and the California Pollution Control Financing Authority and approved by San Jose Water
Company. Incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended June 30, 2010.
Note Agreement between SJW Corp. and the Prudential Insurance Company of America, dated June
30, 2011. Incorporated by reference as Exhibit 10.3 to Form 8-K filed on July 7, 2011.
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)
San Jose Water Company Executive Supplemental Retirement Plan, as amended and restated effective
October 28, 2009. Incorporated by reference to Exhibit 10.5 to Form 10-K for the year ended
December 31, 2009. (2)
Plan Amendment No. 1 to San Jose Water Company Executive Supplemental Retirement Plan as
amended and restated effective October 28, 2009. Incorporated by reference as Exhibit 10.1 to Form 8-
K filed on January 29, 2010. (2)
Amended and Restated Exhibit A to SJW Corp. Executive Supplemental Retirement Plan effective
January 26, 2011. Incorporated by reference as Exhibit 10.3 to Form 10-Q for the quarter ended March
31, 2011. (2)
Plan Amendment to San Jose Water Company Executive Supplemental Retirement Plan effective
January 1, 2011. Incorporated by reference as Exhibit 10.5 to Form 10-Q for the quarter ended
September 30, 2011. (2)
San Jose Water Company Executive Supplemental Retirement Plan, as amended and restated effective
January 1, 2012. (1) (2)
San Jose Water Company Cash Balance Executive Supplemental Retirement Plan, dated July 29, 2009.
Incorporated by reference as Exhibit 10.3 to Form 10-Q for the quarter ended September 30, 2009. (2)
Amendment to the San Jose Water Company Cash Balance Executive Supplemental Retirement Plan,
effective as of January 1, 2011. Incorporated by reference to Exhibit 10.2 to Form 8-K filed on
October 1, 2010. (2)
San Jose Water Company Cash Balance Executive Supplemental Retirement Plan as amended and
restated effective January 1, 2012. (1) (2)
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)
Chief Executive Officer Employment Agreement amended and restated, effective January 1, 2008.
Incorporated by reference to Exhibit 10.9 to Form 10-K for the year ended December 31, 2008. (2)
First Amendment, effective as of January 1, 2010, to the Chief Executive Officer Employment
Agreement amended and restated effective January 1, 2008. Incorporated by reference to Exhibit 10.1
to Form 8-K filed on December 18, 2009. (2)
Second Amendment dated January 26, 2010 to the Chief Executive Officer Employment Agreement
amended and restated effective January 1, 2008. Incorporated by reference to Exhibit 10.11 to Form
10-K for the year ended December 31, 2009. (2)
Offer Letter to Mr. James P. Lynch dated September 22, 2010 and accepted September 27, 2010.
Incorporated by reference to Exhibit 10.1 to Form 8-K filed on October 1, 2010. (2)
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)
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)
SJW Corp. Executive Severance Plan, as amended and restated, effective January 1, 2010 and amended
effective October 26, 2010. Incorporated by reference as Exhibit 10.23 to Form 10-K for the year
ended December 31, 2010. (2)
69
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
San Jose Water Company Special Deferral Election Plan, as amended and restated, effective January 1,
2008. Incorporated by reference as Exhibit 10.14 to Form 10-K for the year ended December 31, 2008.
(2)
San Jose Water Company Special Deferral Election Plan, as amended and restated, effective January 1,
2012. (1) (2)
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)
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)
SJW Corp. Director Compensation and Expense Reimbursement Policies, amended and restated,
effective as of July 29, 2009. Incorporated by reference as Exhibit 10.1 to Form 10-Q for the quarter
ended September 30, 2009. (2)
Form of Stock Option Dividend Equivalent Rights Agreement, effective as of January 1, 2008.
Incorporated by reference as Exhibit 10.18 to Form 10-K for the year ended December 31, 2008. (2)
Chief Operating Officer Stock Option Dividend Equivalent Rights Agreement, as amended and restated
effective as of January 1, 2008. Incorporated by reference as Exhibit 10.19 to Form 10-K for the year
ended December 31, 2008. (2)
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)
Deferred Restricted Stock Award Agreement, amended and restated, as of October 22, 2008.
Incorporated by reference as Exhibit 10.21 to Form 10-K for the year ended December 31, 2008. (2)
Chief Executive Officer Restricted Stock Unit Issuance Agreement, amended and restated effective
October 22, 2008. Incorporated by reference as Exhibit 10.22 to Form 10-K for the year ended
December 31, 2008. (2)
Chief Executive Officer Restricted Stock Unit Issuance Agreement, amended and restated effective
October 22, 2008. Incorporated by reference as Exhibit 10.23 to Form 10-K for the year ended
December 31, 2008. (2)
Chief Executive Officer Restricted Stock Unit Issuance Agreement, amended and restated, effective
October 22, 2008. Incorporated by reference as Exhibit 10.24 to Form 10-K for the year ended
December 31, 2008. (2)
Chief Executive Officer Restricted Stock Unit Issuance Agreement, amended and restated effective
October 22, 2008. Incorporated by reference as Exhibit 10.25 to Form 10-K for the year ended
December 31, 2008. (2)
Chief Executive Officer Restricted Stock Unit Issuance Agreement, amended and restated, effective
October 22, 2008. Incorporated by reference as Exhibit 10.26 to Form 10-K for the year ended
December 31, 2008. (2)
Chief Executive Officer Restricted Stock Unit Issuance Agreement, amended and restated, effective
October 22, 2008. Incorporated by reference as Exhibit 10.27 to Form 10-K for the year ended
December 31, 2008. (2)
Form of Chief Executive Officer Restricted Stock Unit Issuance Agreement. Incorporated by reference
as Exhibit 10.30 to Form 10-K for the year ended December 31, 2009. (2)
Form of Chief Executive Officer Restricted Stock Unit Issuance Agreement. Incorporated by reference
as Exhibit 10.31 to Form 10-K for the year ended December 31, 2009. (2)
10.49
Form of Chief Executive Officer Restricted Stock Unit Issuance Agreement. (1) (2)
10.50
10.51
Form of Restricted Stock Unit Issuance Agreement Award, amended and restated, effective October 22,
2008. Incorporated by reference as Exhibit 10.28 to Form 10-K for the year ended December 31, 2008.
(2)
Form of Restricted Stock Unit Issuance Agreement, amended and restated, effective October 22, 2008.
Incorporated by reference as Exhibit 10.29 to Form 10-K for the year ended December 31, 2008. (2)
70
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
21.1
23
31.1
31.2
32.1
32.2
Form of Restricted Stock Unit Issuance Agreement. Incorporated by reference as Exhibit 10.34 to Form
10-K for the year ended December 31, 2009. (2)
Form of Restricted Stock Unit Issuance Agreement. (1) (2)
Performance Goals for the Chief Executive Officer 2009 Fiscal Year Bonus. Incorporated by reference
as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2009. (2)
Performance Goals for the Chief Executive Officer 2010 Fiscal Year Bonus. Incorporated by reference
as Exhibit 10.36 to Form 10-K for the year ended December 31, 2009. (2)
Performance Goals for the Chief Executive Officer 2011 Fiscal Year Bonus. Incorporated by reference
as Exhibit 10.45 to Form 10-K for the year ended December 31, 2010. (2)
Performance Goals for the Chief Executive Officer 2012 Fiscal Year Bonus. (1) (2)
Form of Indemnification Agreement between SJW Corp. and officers. Incorporated by reference as
Exhibit 10.37 to Form 10-K for the year ended December 31, 2009. (2)
Form of Indemnification Agreement between SJW Corp. and Board members. Incorporated by
reference as Exhibit 10.38 to Form 10-K for the year ended December 31, 2009. (2)
Form of Separation Agreement and Release by and between Angela Yip and San Jose Water Company.
Incorporated by reference to Exhibit 10.1 to Form 8-K filed on December 10, 2010. (2)
Form of Separation Agreement and Release dated September 30, 2010 by and between David A. Green
and San Jose Water Company. Incorporated by reference as Exhibit 10.49 to Form 10-K for the year
ended December 31, 2010. (2)
Subsidiaries of SJW Corp. filed as Exhibit 21.1 to Form 10-K for the year ended December 31, 2009.
Consent of Independent Registered Public Accounting Firm. (1)
Certification Pursuant to Rule 13a-14(a)/15d-14(a) by President and Chief Executive Officer. (1)
Certification Pursuant to Rule 13a-14(a)/15d-14(a) by Chief Financial Officer and Treasurer. (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)
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)
(2)
Filed currently herewith.
Management contract or compensatory plan or agreement.
71
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.
SIGNATURES
Date: February 29, 2012
By
/s/ Charles J. Toeniskoetter
SJW CORP.
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:
February 29, 2012
Date:
February 29, 2012
Date:
February 29, 2012
Date:
February 29, 2012
Date:
February 29, 2012
Date:
February 29, 2012
Date:
February 29, 2012
Date:
February 29, 2012
Date:
February 29, 2012
/s/ W. Richard Roth
W. RICHARD ROTH,
President, Chief Executive Officer and
Member, Board of Directors
(Principal executive officer)
/s/ James P. Lynch
JAMES P. LYNCH,
Chief Financial Officer and Treasurer
(Principal financial officer)
/s/ Wendy Avila-Walker
WENDY AVILA-WALKER,
Controller
(Principal accounting officer)
/s/ Katharine Armstrong
KATHARINE ARMSTRONG,
Member, Board of Directors
/s/ Mark L. Cali
MARK L. CALI,
Member, Board of Directors
/s/ J. Philip DiNapoli
J. PHILIP DINAPOLI,
Member, Board of Directors
/s/ Douglas R. King
DOUGLAS R. KING,
Member, Board of Directors
/s/ Norman Y. Mineta
NORMAN Y. MINETA,
Member, Board of Directors
/s/ Ronald B. Moskovitz
RONALD B. MOSKOVITZ,
Member, Board of Directors
By
By
By
By
By
By
By
By
By
72
Date:
February 29, 2012
Date:
February 29, 2012
Date:
February 29, 2012
By
By
By
/s/ George E. Moss
GEORGE E. MOSS,
Member, Board of Directors
/s/ Charles J. Toeniskoetter
CHARLES J. TOENISKOETTER,
Member, Board of Directors
/s/ Robert A. Van Valer
ROBERT A. VAN VALER,
Member, Board of Directors
73
Consent of Independent Registered Public Accounting Firm
Exhibit 23
The Shareholders and Board of Directors
SJW Corp.:
We consent to the incorporation by reference in the registration statements (Nos. 333-105010 and 333-127383) on
Form S-8 and in the registration statement (No. 333-172048) on Form S-3 of SJW Corp. of our report dated
February 29, 2012, with respect to the consolidated balance sheets of SJW Corp. and subsidiaries as of December
31, 2011 and 2010, 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, 2011, and the
related financial statement schedule, and the effectiveness of internal control over financial reporting as of
December 31, 2011, which report appears in the December 31, 2011 annual report on Form 10-K of SJW Corp.
/s/ KPMG LLP
Santa Clara, California
February 29, 2012
CERTIFICATIONS
Exhibit 31.1
I, W. Richard Roth, certify that:
1. I have reviewed this Annual Report on Form 10-K of SJW Corp. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 29, 2012
/s/ W. Richard Roth
W. RICHARD ROTH
President and Chief Executive Officer
(Principal executive officer)
CERTIFICATIONS
Exhibit 31.2
I, James P. Lynch, certify that:
1. I have reviewed this Annual Report on Form 10-K of SJW Corp. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 29, 2012
/s/ James P. Lynch
JAMES P. LYNCH
Chief Financial Officer and Treasurer
(Principal financial officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of SJW Corp. (the “Company”) on Form 10-K for the year ended December 31,
2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, W. Richard Roth, President
and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that to my knowledge on the date hereof:
(1)
(2)
the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ W. Richard Roth
W. RICHARD ROTH
President and Chief Executive Officer
(Principal executive officer)
February 29, 2012
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of SJW Corp. (the “Company”) on Form 10-K for the year ended December 31,
2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James P. Lynch, Chief
Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge on the date hereof:
(1)
(2)
the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ James P. Lynch
JAMES P. LYNCH
Chief Financial Officer and Treasurer
(Principal financial officer)
February 29, 2012
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Financial Highlights
SJW Corp. and subsidiaries
9
6
.
0
8
6
.
0
6
6
.
0
5
6
.
0
0
6
.
0
2
3
1.
2
1
1.
8
.
8
3
.
8
8
0
0
2
7
0
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
1
1
0
2
0
1
0
2
7
1
1.
5
0
1.
8
0
0
2
7
0
0
2
2
8
.
0
9
0
0
2
6
.
9
0
.
8
1
1
0
2
0
1
0
2
0
.
6
9
0
0
2
Rate of return on average equity (%) Dividends paid per share ($) Basic earnings per share ($)
Shareholder Calendar
Transfer Agent (for inquiries and changes in shareholder accounts):
American Stock Transfer & Trust Company LLC, Shareholder Services Division
6201 15th Avenue, Brooklyn, NY 11219
Phone: (800) 937-5449 Web site: www.amstock.com
Schedule of anticipated dividend declaration, record, and payment dates for 2012:
DECLARATION DATES
January 25
April 25
July 25
October 24
RECORD DATES
February 6
May 7
August 6
November 5
PAYMENT DATES
March 1
June 1
September 4
December 3
Annual Meeting
The Annual Meeting of Shareholders of SJW Corp. is scheduled for Wednesday, April 25, 2012, at 10:00 AM
Pacifi c Time in the Corporation’s principal offi ce at 110 W. Taylor Street, San Jose, California.
Web site:
www.sjwcorp.com
General Offi ce:
(408) 918-7231
Investor Relations:
(800) 250-5147
Directors
Katharine Armstrong, President, Natural Resources Solutions and Katharine Armstrong, Inc.
Mark L. Cali, Court Attorney, Superior Court of California, County of San Luis Obispo
J. Philip DiNapoli, President, JP DiNapoli Companies Inc.
Douglas R. King, Retired Partner, Ernst & Young LLP
Norman Y. Mineta, Global Vice Chairman, Hill & Knowlton Strategies
Ronald B. Moskovitz, Counsel, Morgan, Lewis & Bockius LLP
George E. Moss, Chairman, Roscoe Moss Manufacturing Company
W. Richard Roth, President and Chief Executive Offi cer, SJW Corp.
Charles J. Toeniskoetter, Chairman of the Board, SJW Corp., Chairman, Toeniskoetter Development, Inc.
Robert A. Van Valer, President, Roscoe Moss Manufacturing Company
SJW Corp. Mission
• Maximize shareholder value by achieving strong earnings,
sustainable growth, and competitive total returns.
• Provide high quality, low cost water and exceptional
service to customers.
• Capitalize on water sector growth opportunities through
constructive business partnerships, disciplined manage-
ment, and innovative applications of technology.
• Foster a dynamic work environment that encourages
personal and professional growth, embraces diversity, and
promotes mutual trust and respect.
• Conduct business with strict adherence to responsible
corporate governance and high ethical standards.
• Be a committed corporate citizen through community
involvement, steadfast environmental stewardship, and
an enduring dedication to excellence.
SJW CORP.
SJW CORP.
110 W. Taylor Street, San Jose, CA 95110
408.279.7800 • www.sjwcorp.com